Exchange Rate: The Price Of One Currency In Terms Of Another

An Exchange Rate Equals The Price Of One Currency In Terms Of Another

An exchange rate equals the price of one currency in terms of another. Exchange rates dictate how much residents in one country must pay for goods imported from abroad, and how much residents in other countries must pay for goods exported from the first country. The current market exchange rate is called the "spot exchange rate." The "forward exchange rate" is the exchange rate used in the exchange of bank deposits at some specified future date, known as a "forward transaction." The table below reports the monthly Canadian dollar/U.S. dollar exchange rate (defined as the number of Canadian dollars that purchase one U.S. dollar).

Canadian Dollar/U.S. Dollar Spot Exchange Rate (June-October 2003):

June 2003: 1.3525 C$/US$

July 2003: 1.3821 C$/US$

August 2003: 1.3963 C$/US$

September 2003: 1.3634 C$/US$

October 2003: 1.3221 C$/US$

Paper For Above instruction

In July 2003, the exchange rate was 1.3821 Canadian dollars per U.S. dollar. To determine how many U.S. dollars could be purchased with 100 Canadian dollars, we need to invert this rate, because it indicates how many Canadian dollars are needed to buy one U.S. dollar. The calculation involves taking the reciprocal of the exchange rate to find the value of one Canadian dollar in U.S. dollars.

Calculating the amount:

U.S. dollars per Canadian dollar = 1 / 1.3821 ≈ 0.7232 USD/CAD

Therefore, with 100 Canadian dollars, the U.S. dollars you could purchase is:

100 CAD × 0.7232 USD/CAD = 72.32 USD

This means that in July 2003, with 100 Canadian dollars, you could buy approximately $72.32 U.S. dollars.

Understanding exchange rates and their calculations is crucial in international finance and trade. The spot exchange rate reflects the current market price, influencing currency conversion and international transactions. When converting currencies, especially over different periods, investors and traders often look at forward exchange rates to hedge against potential fluctuations. These rates are determined based on the spot rate adjusted for interest rate differentials between the two countries involved.

In economic terms, exchange rates impact trade balances, inflation, and monetary policy decisions. For example, a rise in the Canadian dollar relative to the U.S. dollar makes Canadian exports more expensive and imports cheaper, potentially affecting the trade deficit. Conversely, a weaker Canadian dollar could boost exports but increase the cost of imports, influencing inflation and consumer prices.

It is also important to understand that the exchange rate can be influenced by various factors, including interest rates, inflation, political stability, and market speculation. These factors contribute to currency valuation and fluctuations, affecting businesses engaged in international commerce and investors operating in global financial markets.

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