What is the Exchange Rate Formula?
The exchange rate is defined as the rate on the basis of which two countries involved in trade exchange marketable items or commodities. It is basically the cost of exchanging one currency for another currency. Therefore, the exchange rate can be calculated as per the below-mentioned relationship: –
Additionally, it can also be determined as per the below-mentioned relationship: –
Here, money after exchange corresponds to foreign currency and the money before an exchange is regarded as domestic currency. The exchange rate is determined by making up pairs between different currencies. The financial institutions or the central banks of the respective nations helps in the determination of the currency pairs.
Explanation
The equation for the exchange rate can be calculated by using the following steps:
Step 1: Firstly, determine the amount that is to be transferred or exchanged from domestic currency to foreign currency.
Step 2: Next, the individual can access foreign exchange markets through trading platforms or through financial institutions to determine the available exchange rates prevalent between the two nations.
Step 3: Next, multiply the exchange rate with the domestic currency to arrive at the foreign currency.
Examples of Exchange Rate Formula (with Excel Template)
Below is an example of the exchange rate equation.
Example #1
Let us take the example of a trader who wants to make an investment in the exchange-traded funds traded in US markets. However, the trader lives in India and 1 INR corresponds to 0.014 USD. The trader has INR 10,000 to invest in the exchange-traded funds traded in the offshore market.
Help the trader determine the value of INR investment in terms of US currency.
Solution:
Use the below-given data for the calculation of the money after the exchange rate.
Determine the value of exchange in terms of US dollars as displayed: –
The value of exchange in terms of US dollars = 0.014*10,000
Value of Exchange in Terms of US dollars will be:-
Money in After Exchange = $140.
Therefore, the trader would get $140 in terms of USD dollars when he approaches a bank or a foreign exchange institution to convert INR to USD currency.
Example #2
Let us take the example of an individual planning a trip from the USA to the European Union. He has a planned budget of $5,000. The travel agent informs the travelers that if he exchanges US dollars to Euro, he would get €4,517.30.
Help the traveler determine the exchange rate that exists between the USA and the Euro.
Solution:
Use the below-given data for the calculation of the exchange rate.
Determine the exchange rate between US and Euro as displayed: –
Exchange Rate (€/ $) = € 4,517.30 / $5,000
Exchange Rate will be:-
Exchange Rate (€/ $) = 0.9034
Therefore, the exchange rate between the US and Euro is 0.9034. Therefore, if the traveler plans to raise the budget then he can do so taking the above-calculated exchange rate into consideration.
Example #3
Let us take the example of a trader from the USA to make investments in the UK financial market. He has a planned budget of $20,000. The offshore broker informs the trader that if he exchanges US dollars to the British pound, he would get £15,479.10
Help the trader determine the exchange rate that exists between the USA and the UK.
Solution:
Use the below-given data for the calculation of the exchange rate.
Determine the exchange rate between US and Euro as displayed: –
Exchange Rate (£/ $) = £15,479.10 / $20,000
Exchange Rate (£/ $) will be:-
Exchange Rate (£/ $) = 0.77
Therefore, the exchange rate between the US and the pound is 0.77. Therefore, if the trader plans to raise the budget then he can do so taking the above-calculated exchange rate into consideration.
Exchange Rate Calculator
You can use this Exchange Rate Calculator.
| Money in Foreign Currency | |
| Money in Domestic Currency | |
| Exchange Rate | |
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Relevance and Uses
The exchange rates are critical to be employed because it helps in the facilitation of foreign trades. It additionally helps the lender make good investments in the offshore arena. It also helps tourists traveling across the globe to determine the cost of travel from domestic countries to offshore locations. The exchange rates also help in indicating the fact that how well the domestic country holds the power of purchase with respect to the foreign nations.
The exchange rates can be traded in forward markets as well hence it can be utilized for the purpose of hedging corresponding to the exposure that is being traded between different countries.
Recommended Articles
This has been a guide to the exchange rate formula. Here we discuss how to calculate the exchange rate along with practical examples and downloadable excel template. You can learn more about financial analysis from the following articles –
