How To Calculate Foreign Currency

HOW TO CALCULATE FOREIGN CURRENCY
Exchanging one currency for another needs us to apply a quoted market price, known as the
exchange rate. Sometimes we need to multiply by the rate. Sometimes we need to divide by
it.
The exchange rate is defined as the rate based on which two countries are involved in the
trade exchange of marketable items or commodities. It is the cost of exchanging one currency
for another currency. Mostly, exchange rate formula economics pans out in a floating
market where the prices increase or decrease based on demand and supply. One can calculate
the exchange rate as per the below-mentioned relationship: –
 Exchange Rate = Money in Foreign Currency / Money in Domestic Currency

Additionally, it can also be determined as per the below-mentioned relationship: –
 Exchange Rate = Money in After Exchange / Money Before Exchange
How To Calculate?
Finding the market exchange rate is one thing, but calculating it is another. Let’s look at some
examples to make calculating exchange rates easier. We’ll continue with the popular
currency pairing of EUR/USD.
 If the EUR/USD exchange rate is 1.09, it means that it costs 1.09 USD to get one euro.
In other words, you’ll need to spend $1.09 to get 1€. Easy.
 But what if you want to know how many euros it costs to buy $1?
1 ÷ [exchange rate] = [amount you need to buy one unit]
 So, in this case: 1 ÷ 1.09 = 0.92.

 This means it costs just 0.92€ to buy $1.
Converting euro to USD

Let’s say you live in France and want to donate 1,000€ to a charity in the USA. You’d like to
calculate how much USD your 1,000€ will get. You check the exchange rate from EUR to
USD and it’s 1.09. This means that every 1€ earns you $1.09.
You can use the following formula to find out how much USD you will get for your 1,000€:
[amount you want to exchange i.e. 1,000€] X [exchange rate i.e. 1.09]
= [amount you’ll have after the exchange]
So, in this case: [1,000€] X [1.09] = [$1,090]
This means your 1,000€ will get $1,090.
Let’s say you live in California and you’re planning a tour around Italy. The tour costs
5,000€. You’d like to know how much USD you’ll have to spend to pay off the money for
your tour.
You check the exchange rate from USD to EUR and it’s 0.92. This means that every $1 you
have earns you 0.92€.
You can use the following formula to find out how much USD you’ll need to get your
5,000€:
1
[amount you need after exchanging i.e. 5,000€] ÷ [exchange rate i.e. 0.92]
= [amount you need to exchange]
So, in this case: [5,000€] ÷ [0.92] = [$5,434]
This means you’ll need $5,434 to pay off your 5,000€ tour.
1. Firstly, determine the amount to be transferred or exchanged from domestic currency to

foreign currency.
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
3. Next, multiply the exchange rate with the domestic currency to arrive at the foreign currency.
Example1
# XYZ, 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.
The value of exchange in terms of US dollars = 0.014*10,000

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.
Example2
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 traveller that if he exchanges US dollars to Euro, he
will get €4,517.30.
(£/ $) = €4,517.30/$5,000 = €0.9035.
Example3
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.
(£/ $) = £15,479.10 / $20,000 = €0.77
MONEY FOR STUFF

Pricing is easier when we’re buying or selling physical stuff for money. We simply multiply
the quantity by the money price per unit.
Let’s say the oil price is $50 per barrel, and we want to sell a million barrels. The money
value for the exchange is simply:
$50 per barrel x 1 million barrels = $50m

WHY WE MULTIPLIED
We multiply by commodity prices because of the way they’re quoted. The commodity quote
is a variable amount of money per fixed conventional unit of the commodity.
2
Oil prices are quoted in dollars per barrel. So, multiplying a number of barrels by dollars per
barrel gives the dollar value for the exchange. The oil is the basis, or the ‘base’ of the
conventional oil-price quote.
MONEY FOR MONEY
Currency dealing means exchanging money for money.
Does simple multiplication work for currency deals? Sometimes, but not all the time. It
depends which way round the rate is quoted.
For FX, we need to ask two separate questions:
(1) Which is the base currency in the given quote?
(2) Are we converting from the base, or to the base?

WHICH IS THE BASE CURRENCY?
The base currency won’t always be the same. For example, the rate between dollars and euros
can be quoted as either:
(i) A variable number of dollars per €1; or
(ii) A variable number of euros per $1.

€ / $1.25
The first-mentioned currency is conventionally the base. That’s euros in this case. The euro is
the currency that there’s one fixed unit of.
This is quoted in the market as EUR/USD 1.25, meaning the base currency euro would be
exchanged for dollars at a rate of €1 to $1.25.
BEST OF ORDER
Note the ordering of the currencies in the exchange-rate quote. We saw that the first-
mentioned currency is the base.
This is a different convention from commodity prices, such as dollars per barrel = 50. For a
commodity, it’s the second-mentioned item that is the base. In our example, this is the barrel
of oil.
Currencies are conventionally quoted the other way round. This can make FX tricky.
$/€0.80
Taking another example: which is the base currency in the quote USD/EUR 0.80?
Again, the base currency is the first mentioned. In this case it’s the dollar. So the quote
USD/EUR 0.80 means $1 would be exchanged
for €0.80.
Interestingly, $/€0.80 is just an alternative way of expressing our earlier quote €/$1.25. The
base has jumped from euro to dollar, but it won’t make any difference to the results. So long
as we apply either of the quotes correctly, they will each produce exactly the same results,
FROM THE BASE
To convert from the base currency, we multiply by the exchange rate.
Just like multiplying to apply a commodity price. Indeed, our base currency can be viewed as
the commodity in the quote.
Say we need to convert €8m into dollars, by applying the exchange rate EUR/USD 1.25.
3
The euro is the base currency. We’re converting from the base.
So multiply:
€8m x $1.25 per euro = $10m

TO THE BASE
Let's look at an example: convert €8m into dollars, using an exchange rate of USD/EUR 0.80.
The base currency in the quote USD/EUR 0.80 is the dollar. The quote means $1 = €0.80.
We’re converting from €8m to dollars. So we’re converting to the base currency dollars this
time. So, we’ll divide by the exchange rate
of 0.80:
€8m/€0.80 per dollar = $10m

PERFECT PROPORTIONS
If we tabulate our results, we see that each currency stays beautifully in proportion with the
other.
$ €
FX rate 1 0.80
Amounts 10m 8m
There are more dollars than euros in the rate $1/€0.80. There are also more dollars than euros
in the final money amounts, $10m exchanged for €8m.
How Does It Affect Import And Export?

Exchange rates play a significant role in shaping a country’s trade dynamics by influencing
its import and export activities. Here’s how exchange rate formula economics affect
imports and exports:
Imports
 Appreciation of Domestic Currency: When a country’s currency appreciates (increases in

value) relative to other currencies, it becomes stronger. This makes imports cheaper since you
can buy more foreign currency with your own currency. As a result, consumers and
businesses can afford to purchase more foreign goods and services at a lower cost. This can
lead to an increase in imports.
 Cheaper Foreign Goods: A stronger domestic currency means that the cost of foreign goods
and services decreases. This can make imported products more attractive and competitive,
leading to an increase in the demand for imports.
Exports
 Depreciation of Domestic Currency: A depreciation (decrease in value) of the domestic

currency makes exports more affordable for foreign buyers. Foreign consumers and
businesses need to spend less of their currency to purchase the same amount of the domestic
currency, leading to an increase in demand for domestic products.
 Boost Export Competitiveness: A weaker domestic currency makes the country’s goods and
services cheaper for foreign buyers. This enhanced affordability can make domestic products
more competitive in international markets, potentially boosting export volumes.
4
 Inflationary Pressures: A depreciated currency can also lead to higher domestic inflation, as
the cost of imported goods rises. While this can be a concern for domestic consumers, it can
also make domestically produced goods more appealing compared to imported alternatives.

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HOW TO CALCULATE FOREIGN CURRENCY

 Exchange Rate = Money in Foreign Currency / Money in Domestic Currency

 So, in this case: 1 ÷ 1.09 = 0.92.

Converting euro to USD

= [amount you need to exchange]

So, in this case: [5,000€] ÷ [0.92] = [$5,434]

1. Firstly, determine the amount to be transferred or exchanged from domestic currency to

The value of exchange in terms of US dollars = 0.014*10,000

(£/ $) = £15,479.10 / $20,000 = €0.77

MONEY FOR STUFF

$50 per barrel x 1 million barrels = $50m

(1) Which is the base currency in the given quote?

(2) Are we converting from the base, or to the base?

(i) A variable number of dollars per €1; or

(ii) A variable number of euros per $1.

€8m x $1.25 per euro = $10m

€8m/€0.80 per dollar = $10m

How Does It Affect Import And Export?

 Appreciation of Domestic Currency: When a country’s currency appreciates (increases in

 Depreciation of Domestic Currency: A depreciation (decrease in value) of the domestic

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