Exchange Rates

Lesson:

An exchange rate tells you how much one country's currency is worth in terms of another country's currency. In other words, it's the price of one currency in terms of another. For example, if the exchange rate is 1.25 Euros for 1 US Dollar, it means 1.25 Euros can be exchanged for 1 US Dollar and that 1 US Dollar can be exchanged for 1.25 Euros.

Many people follow exchange rates very closely because they change over time. This means that the cost of doing business with another country can fluctuate over time.

  • When one currency can be exchanged for more of another currency than before, we say it's getting stronger.
  • When one currency can be exchanged for less of another currency than before, we say it's getting weaker.

When comparing two currencies, any relative change in value means that one currency got stronger and the other got weaker.

Often we'll say things like the exchange rate is $1.25 Euros per dollar. But that's kind of wordy. It's often easier to just give the number, followed by the word direct or indirect.

  • Direct tells you how many units of a foreign currency you receive for every unit of your own currency. In other words, a direct quote will tell you how much of a foreign currency you receive for exactly one unit of your own.
  • Indirect tells you how many units of your own currency someone will receive for every unit of the foreign currency. In other words, an indirect quote will tell you how much of your own currency is equal to exactly one unit of the foreign currency.
You're the CEO of Shady corp. the famed are trying to make sense of incoming bills that are in different units of currency.

Here's what you know:

  • You only have 15.17 rubles.
  • The currency in your country is the ruble.
  • The foreign currency is the rand.
  • The indirect exchange rate is currently 1.2307.
How many rands is your domestic currency worth?

Answer:

  • 18.67 rands

Explanation:

  1. First, remember the indirect exchange rate is how many of the foreign currency can be purchased with one unit of the domestic currency.
  2. We were given the indirect exchange rate.
    1 RUBLE = 1.2307 RANDS
  3. We don't have 1 ruble though, we have 15.17 of them. Let's multiply both sides by 15.17.
    1 RUBLE * 15.17 = 1.2307 RANDS * 15.17
  4. Now let's just solve the equation and find out how many rands our rubles are worth.
    15.17 RUBLES = 18.67 RANDS
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