What Is an Exchange Rate?
An exchange rate is the rate at which one currency can be swapped for another: a price tag on money itself.
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In this lesson you learn to
- Explain what an exchange rate is: the price of one currency in another
- Convert an amount with a quoted rate, in both directions
- Describe what it means when a currency gets stronger or weaker
Check yourself
Think about each question, pick what you would answer if you like, then select “Show answer” to see the solution and why. Nothing is graded or sent to us. Example numbers are worked examples, not predictions.
1.What is an exchange rate?
An exchange rate is the rate at which one currency can be swapped for another: a price tag on money itself.
2.In a worked example, one dollar costs 0.92 euros. How many euros do 100 dollars become, before any fees?
Multiply the dollars by the rate: 100 x 0.92 = 92 euros. The rate is a worked example, not a market price.
3.At the example rate of 0.92 euros per dollar, how many euros do 500 dollars buy?
Multiply: 500 x 0.92 = 460 euros. Dividing instead gives 543, the common slip.
4.One dollar costs 0.92 euros in the example. About how many dollars does one euro cost?
To read a rate the other way, divide 1 by the rate: 1 / 0.92 = about 1.09 dollars per euro.
5.True or false: if one dollar costs 0.92 euros, then one euro costs less than one dollar.
The same rate reads two ways. One dollar = 0.92 euros means one euro = about 1.09 dollars.
6.Which statements about exchange rate systems are correct? Select all that apply.
Several answers can be correct.
Floating rates are set by the market; pegged rates are held by the central bank. Many countries sit in between.
7.Marge changes 500 dollars at an example rate of 0.90, Leo at 0.94. How many euros apart are the two results?
Marge: 500 x 0.90 = 450. Leo: 500 x 0.94 = 470. The price of money moved, nobody made a mistake.
8.A coffee machine costs 50 euros. In the example, the dollar weakens from 0.92 to 0.85 euros per dollar. About what does the machine cost in dollars after the move?
At 0.92 the machine costs about 54 dollars (50 / 0.92). At 0.85 it costs about 59 dollars (50 / 0.85). The machine did not change; the price of money did.
9.True or false: a stronger currency is always good news for everyone.
The exchange rate affects prices of imported goods. A stronger currency lowers import prices but raises the price of exports for foreign buyers.
10.The reference rate is 0.92, but the counter offers 0.89 euros per dollar in the example. How many euros do 100 dollars bring at the counter?
The gap between the reference rate and the customer rate is called a spread. Here it costs about 3 euros per 100 dollars (about 3 percent), an example, not a real price.
Sources (3)
- European Central Bank: What is the role of exchange rates? (Explainer "Tell me more")
- IMF Finance & Development, Dezember 2009: Atish R. Ghosh, Jonathan D. Ostry, "Choosing an Exchange Rate Regime"
- Eigene Berechnung (Umrechnung mit synthetischen Beispielkursen, ohne Gebuehren)
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Education only. Not financial advice.