Establish Money Market Equilibrium
Predict Changes in the Euro–Dollar Exchange Rate
What Are Real Exchange Rates?

Exchange Rate as the Price of Domestic Currency

Working with the euro–dollar exchange rate implies the price of the dollar in euros. You can use this exchange rate to convert a dollar amount into euros, or vice versa.

Using the same example of the American exporter of backpacks who expects €135,000 as a payment for its latest shipment, this time you have the euro–dollar exchange rate of €0.80645 (the inverse of $1.24, or 1 / 1.24; try to keep more than two decimals so that the amounts are the same as in the previous example).

The exchange rate is defined as €/$, and the amount is denominated in euros. You cancel the euros to get the amount in dollars by dividing the euro total by the euro–dollar exchange rate:

image0.jpg

or

€135,000 / €0.80645 = $167,400

Therefore, the American exporter receives $167,400.

In the example of the American importer of French cheese, the French exporter is paid $185,000. The French firm’s bank applies the euro–dollar exchange rate of €0.80645 and deposits the dollar amount as euros.

This time the exchange rate is defined as €/$, and the amount is denominated in dollars. You cancel the dollars to get the amount in euros by multiplying the dollar amount by the euro–dollar exchange rate:

image1.jpg

or

$185,000 x 0.80645 = €149,193

The French firm receives €149,193 from this transaction. (Note that the small discrepancy between this total and the previous result is due to rounding.)

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The Role of Multinational Firms in Foreign Exchange Markets
What Is an Exchange Rate Regime?
Apply Relative Price to Exchange Rates
Exchange Rates in a Commodity Standard System
How to Work with the Purchasing Power Parity (PPP)
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