A currency exchange rate
A currency exchange rate is the expense of one country's currency in another country's currency ("Investopedia"). As a result, it has two components: a local currency and the currency of another nation. An exchange rate consists of one country's currency, known as the base currency, and another country's currency, known as the counter currency. Many exchange rates around the world favor the US dollar as the preferred currency, with other local currencies countering it depending on the economy.
The importance of exchange rates
Exchange rates are important, particularly when considering how modern economies work. They make provisions for cross-border commercial transactions. It is important, therefore, to have an exchange rate as one country's currency might not always be accepted in another country (Pearson Schools and Colleges).
Fluctuating exchange rates
Exchange rates keep on fluctuating throughout the week as the currencies are actively being traded. This causes the prices of the currencies to rise and fall. If the currency readings are USD/CAD and the forex reading is 1.22899, this means that for 1 U.S. dollar you have to give away 1.22899 Canadian dollars. The currency that appears first in the reading always represents a single measure of that currency. In this case, since USD is the first currency, it indicates that 1 U.S. dollar is equal to 1.22899 Canadian dollars. In this case, the currency that has a higher value is the U.S. Dollar. On the other hand, when one wants to know what it costs to exchange one Canadian dollar using the U.S. dollar, the formula is the 1 divided by the exchange rate.
Calculating exchange rates
For this case, 1 divided by 1.22899 equals 0.8137. Therefore, it will take 0.8137 U.S. dollars to exchange for one Canadian dollar. When reading this exchange rate, it will be shown as CAD/USD. For instance, when one has to transact business like buying an iPhone in a shop in Canada, what amount in U.S. dollars would the customer need to convert? In this case, you will look at the CAD/USD exchange rate that reads 0.8137. The formula to calculate the amount of USD needed will be CAD multiplied by the exchange rate. Thus, if an iPhone 6 in Canada goes for CAD 899, an amount of USD the customer will need to pay is 899 * 0.8137 = 731.52. Therefore, the customer would need to have approximately USD 732 to convert to Canadian dollars in order to buy an iPhone 6 in Canada.
An example with a company in Japan
For instance, you have a company in Japan. The company has two employees whose payroll is in Japanese yen. Now you need to calculate the amount of U.S. dollars you will send to Japan to take care of their salaries. If the employee's total earning is 761,000 yen, with the forex rate reading it will be JPY/USD = 0.00895800. The amount the employer is required to send is JPY multiplied by the exchange rate, i.e. 761,000 * 0.00895800 = USD 6,817.038
The impact of exchange rates
The employer who is in the United States would have to send approximately USD 6,818 dollars in order to take care of the salaries of the two employees in Japan. Exchange rates are critical in the current global economy. They have enabled numerous transactions to take place worldwide. The exchange rates are also used to gauge how a country is fairing on economically.
Works Cited
Pearson Schools and Ccolleges. “How Important are Exchange Rates?” Pearsonschoolsandfecolleges.co.uk, n.d., https://www.pearsonschoolsandfecolleges.co.uk/Secondary/BusinessAndEconomics/14-16/EdexcelGCSEBusiness/Samples/SampleStudentBookMaterial/StudentBook-Unit5SampleChapter.pdf. Acessed 19 Sept. 2017.
Investopedia. “Exchange Rate.” n.d. Investopedia.com, n..d., http://www.investopedia.com/terms/e/exchangerate.asp. Accessed 19 Sept. 2017.
