Foreign Exchange & Currency Basics

LeoFinance
1 month ago
5 Min Read
900 Words

Hi there. I want to cover the basics of foreign exchange and currency with mathematics. As someone in Canada who does some online shopping, a lot of the product and services websites deal with US Dollars. The prices for computer parts (for example) appear to low compared to Canadian prices. However, once the currency conversion is done into Canadian pricing, I realize that the products are a bit pricey.

Math text/images rendered with QuickLaTeX.com.


Pixabay Image Source

 

US Dollar Priced Items


A lot of products and services online are based in the United States Dollar. Even Youtube videos that mention products such as computer components list prices in the US Dollar. If you live in the United States, there is not much need for knowing nor using currency conversions (unless you buy products priced in the Canadian Dollar, Euro, Yuan, etc.).

For us guys in Canada, Europe, Australia and anywhere not in the United States, we have to do currency conversions to our local currency to obtain actual prices. Obtaining the actual prices helps with purchasing decisions (online). Something may look cheap but once the currency conversion is done that cheap price may not be that cheap.


Pixabay Image Source

 

Converting US Dollar Priced Items Into Local Currencies


In this section, I go over some examples of converting US based prices into different currency prices.

 

Example - Euro To USD & USD To Euro

The exchange rate for Euro to USD is 1 Euro is equal to 1.17 USD. This is also 1 USD for 0.8547 Euro.

An object that is priced at 300 Euros has an American price of $351 USD (300 Euro x 1.17 USD/Euro).

Ethereum priced at $370 USD is the same price as $316.24 Euro. This calculation can be done from $370 USD x 0.8547 Euro / USD or from $370 USD divided by 1.17 Euro/USD.
 

 

Example - USD to CAD

At the time of writing 1 US Dollar is worth 1.32 Canadian Dollar. This also means that 1.32 Canadian dollars buys 1 USD Dollar or 1 Canadian Dollar buys about 0.76 US Dollars.

A $10 USD monthly subscription would cost $13.20 in Canadian Dollars. (10 USD x 1.32 CAD/USD)

A $800 PC Build priced in US Dollars would be $1056 in Canadian Dollars. (800 USD x 1.32 CAD / USD)

Bitcoin priced at $11 406 USD is the same as $15 055.92 CAD (11 406 USD x 1.32 CAD/USD).

 

 

Example - Euro To CAD

At the time of writing the exchange rate from Euro to CAD is 1 Euro for 1.55 CAD. This is also about 0.645 Euro for 1 CAD.

Suppose that a Virtual Private Network (VPN) Plan costs $20 Euro per month. This VPN plan priced in Canadian Dollars is 31 CAD.

This calculation is from:

 

Currency Exchange Rates Do Change Over Time


In this section, I want to put a quick note out there that currency exchange rates do change over time. These rates do not stay the same. Factors which influence currency exchange rates to change include:

  • Inflation In The Country
  • Interest Rates
  • Government Debt
  • Economic Performance
  • Political Stability

Sources:

 


Pixabay Image Source

 

Appreciation & Depreciation Concepts


It is well known that things change over time in countries and between countries. Currency values and exchange rate do change over time. We have terms to classify whether a currency is improving or getting weaker in terms of value and purchasing power.

 

Which Currency Is Stronger Between The Two??

The exchange rate of 1 USD to 1.32 CAD means that it takes 1 USD dollar to buy 1.32 Canadian Dollars. It also means that 1.32 Canadian Dollars to buy 1 US Dollar or 1 CAD for about 0.76 USD. In this exchange rate the USD is a stronger currency relative to the Canadian dollar. One US Dollars buys more than 1 unit of Canadian Dollars. One unit of the Canadian Dollar buys less than 1 unit of the American dollar.

 

Appreciation Of A Currency

Suppose that the exchange rate of 1 USD to 1.32 CAD changes to 1 USD to 1.40 CAD. One USD buys even more of the Canadian dollar and it takes more of the Canadian dollar to buy a single US Dollar. The American Dollar improves and iis appreciating. The Canadian Dollar here loses value versus the USD and is depreciating.

 

Depreciation Of A Currency

The opposite of appreciation is depreciation. Depreciation refers to something that loses value. A common example of an object that depreciates in value is a new car. A new car loses value when it is used often.

If the exchange rate goes from 1 USD to 1.32 CAD into 1 USD to 1.2 CAD, the American Dollar depreciates or loses value and the Canadian Dollar appreciates. For one unit of the US Dollar, you now buy less of the Canadian Dollar. The Canadian Dollar now buys a more of the US Dollar. Note that the USD is still the stronger currency as 1 USD buys more than 1 CAD and 1 CAD buys less than 1 USD.

Supplemental Youtube Video:

 

Thank you for reading.

Posted Using LeoFinance Beta