Basic International Finance Equations to Remember
International finance is a subject based on numbers. And, with that comes calculations. Calculating the fundamentals of international finance puts the subject in perspective and gives it a visual component to help understand how things work. Here are some of the widelyused equations in international finance:

Inverting exchange rates. If you have the Chine Yuan (CNY)dollar exchange rate, but need the dollarChinese Yuan exchange rate, just invert the former. Suppose you have the exchange rate as CNY6.22 per dollar. The dollarChinese Yuan exchange rate is:

Calculating cross rates. Suppose the dollarBritish pound (GBP) and the dollarCanadian Dollar (CAD) exchange rate is $1.51 and $0.97, respectively. Even if the Canadian dollarBritish pound exchange rate is not listed, you can easily calculate the Canadian dollarBritish pound exchange rate as CAD1.57:

Therefore,
Of course, if you need the British poundCanadian dollar rate, take the inverse of CAD1.57:

Calculating real exchange rate (RER). The nominal exchange rate indicates the relative price of two currencies. The real exchange rate expresses the relative price of two countries’ consumption baskets in the same currency. If the price of the consumption basket in the U.S. and the Eurozone is P_{US} and P_{E}, respectively, and you have the dollareuro exchange rate, the RER becomes:

By multiplying the exchange rate with the price of the European consumption basket, you convert the latter into dollar. Therefore, the dollar price of the European basket divided by the price of the U.S. basket (expressed in dollars) gives you the real exchange rate.

If the dollarEuro exchange, the euro price of the European basket, and the dollar price of the U.S. basket are $1.31, €135, and $121, the RER is:

Calculating the percent change in exchange rates. The percent change formula is a handy tool to calculate the change in exchange rates (or other variables). If a year ago the dollareuro exchange rate was $1.32 and is now $1.31, then the change in the exchange dollareuro exchange rate (ER) is 0.76 percent appreciation in the dollar:

Applying the interest rate parity (IRP). This concept relates the nominal interest rates in home (R_{H}) and foreign country (R_{F}) to the change in the exchange (ρ), which is referred to as forward premium or discount:

For smaller differences between two countries’ interest rates, you can use the following approximation:

After calculating ρ, you apply it to the spot rate (S_{t}) to calculate the IRPsuggested forward rate (F_{IRP}):

If, for example, R_{H}, R_{F}, and S_{t} are 1 percent, 1.12 percent, and $1.32 per euro, the forward discount on euro is 0.12 percent:

In this case, the IRPsuggested forward rate is $1.318 per euro:

Using the purchasing power parity (PPP). The PPP relates home country’s inflation rate (π_{H}) to that of foreign country (π_{F}) to predict the change in the exchange rate (e):

For smaller differences between two countries’ inflation rates, you can use the following approximation:

After calculating e, you apply it to the spot rate (S_{t}) to calculate the PPPsuggested expected exchange rate :

If, for example, π_{H}, π_{F}, and S_{t} are 3 percent, 2 percent, and $1.31 per euro, the dollar is expected to depreciate by 0.98 percent against the euro:

Given the spot rate of $1.31 per euro, the PPPsuggested expected exchange rate is $1.323 per euro: