The Foreign Currency Markets

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What are foreign
currency exchange
rates?


Foreign currency exchange
rates are what it costs to exchange
one country’s currency for
another country’s currency. For
example, if you go to England on
vacation, you will have to pay for
your hotel, meals, admissions
fees, souvenirs,and other expenses
in British pounds. Since your
money is all in US dollars,you will
have to use (sell) some of your
dollars to buy British pounds.
Assume you go to your bank
before you leave and buy $1,000
worth of British pounds. If
you get 565.83 British pounds
(£565.83) for your $1,000, each
dollar is worth .56583 British
pounds.This is the exchange rate
for converting dollars to pounds.
If £565.83 isn’t enough cash
for your trip, you will have to
exchange more US dollars for
pounds while in England.
Assume you buy another $1,000


worth of British pounds from a
bank in England and get only
£557.02 for your $1,000. The
exchange rate for converting
dollars to pounds has dropped
from .56583 to .55702. This
means that US dollars are worth
less compared to the British
pound than they were before
you left on vacation.
Assume that you have £100
left when you return home.You
go to your bank and use the
pounds to buy US dollars. If the
bank gives you $179.31, each
British pound is worth 1.7931
dollars.This is the exchange rate
for converting pounds to dollars.
Theoretically, you can convert
the exchange rate for buying a
currency to the exchange rate
for selling a currency, and vice
versa, by dividing 1 by the
known rate. For example, if the
exchange rate for buying British
pounds with US dollars is .56011,
the exchange rate for buying US
dollars with British pounds is
1.78536 (1 ÷ .56011 = 1.78536).