Exchange Rate as the Price of Foreign Currency
The dollar–euro exchange rate implies the price of the euro in dollars. You can use this exchange rate to convert a dollar amount into euros, or vice versa.
Suppose you’re an American exporter of backpacks. The importing firm in Germany wires a payment of 135,000 to your bank for the August 2012 shipment of backpacks. The bank deposits the money in your account as dollars, at an exchange rate of $1.24. What’s the total number of dollars deposited into your account?
The exchange rate is defined as $/, and the amount of money is denominated in euros. You cancel the euros to find the amount in dollars by multiplying the euro payment by the dollar–euro exchange rate:
135,000 x $1.24 = $167,400
In this case, your bank deposits $167,400 into your account.
Suppose you’re an American importer of French cheese. You receive a new shipment for which you have to pay the French firm $185,000. If the French firm’s bank applies the dollar–euro exchange rate of $1.24, how many euros does the French firm receive?
Again, the exchange rate is defined as $/, and the amount is denominated in dollars. You cancel the dollars to find the amount in euros by dividing the dollar payment by the dollar–euro exchange rate:
$185,000 / 1.24 = 149,194
The German firm receives 149,194 from this transaction.