What is the Exchange Rate Formula?

The exchange rate is defined as the rate based on which two countries are involved in trade exchange marketable items or commodities. It is the cost of exchanging one currency for another currency. Therefore, can calculate the exchange rate 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 institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more or the central banks of the respective nations help determine the currency pairsCurrency PairsA currency pair is a combination of two different national currencies valued against one another. Its purpose is to compare the value of one particular nation’s currency to another.read more.

Explanation

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  • Firstly, determine the amount to be transferred or exchanged from domestic currency to foreign currency. 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 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 invest in the exchange-traded funds traded in US markets. The trader has INR 10,000 to invest in the exchange-traded funds traded in the offshore market. However, the trader lives in India, and 1 INR corresponds to 0.014 USD.

Help the trader determine the value of INR investment in terms of US currency.

Solution:

Use the below-given data to calculate 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 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 traveler that if he exchanges US dollars to Euro, he will get €4,517.30.

Help the traveler determine the exchange rate between the USA and the Euro.

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, he can consider the above-calculated exchange rate.

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 for the British pound, he will get £15,479.10

Help the trader determine the exchange rate between the USA and UK.

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, he can consider the above-calculated exchange rate.

Exchange Rate Calculator

You can use this Exchange Rate Calculator.

Relevance and Uses

The exchange rates are critical to be employed because it helps facilitate 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. Finally, the exchange rates also help indicate how well the domestic country holds the purchasing power concerning the foreign nations.

The exchange rates can be traded in forward marketsForward MarketsForward Market refers to a market that deals in over the counter derivative instruments and thereby agree to take delivery on a set price and time in the future. In addition, the contract can be customized with regard to the rate, quantity, and also with regard to the date.read more as well; hence can be utilized for hedging corresponding to the exposure traded between different countries.

This has been a guide to the exchange rate formula. Here, we discuss calculating the exchange rate, practical examples and a downloadable excel template. You can learn more about financial analysis from the following articles –

  • Like-Kind ExchangeRisks in Foreign ExchangeRisks In Foreign ExchangeForeign exchange risk is an unfavourable change in the settlement value of a transaction entered in a currency other than the base currency (domestic currency), also referred to as currency risk or exchange rate risk.read moreFormula for Exchange Rate RiskFormula For Exchange Rate RiskExchange Rate Risk is the risk of loss the company bears when the transaction is denominated in a currency other than the company operates. It is a risk that occurs due to a change in the relative values of currencies.read moreCurrency AppreciationCurrency AppreciationCurrency appreciation is a rise in the value of a national currency over the importance of international currencies due to an increase in the demand for domestic currency in a global market, a rise in inflation and interest rates, and flexibility of fiscal policy or government borrowing.read more