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:

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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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