Foreign exchange

Last updated: September 24, 2021  | 

What is foreign exchange?

Currency exchange is the process of exchanging currency from one currency to another. It is also known as foreign exchange. The value of a currency depends on the market forces related to trade, investment, tourism and geopolitical risks. There are many different offices available where the money can be exchanged at a reasonable price. Money can be exchanged easily in the bank, with the help of brokers, institutions and individual traders. 

FOREX market

Foreign exchange transactions can be carried out in the foreign exchange market, also known as the FOREX market. The foreign exchange market is a market where trillions of currencies change hands every day. The person exchanging the money gives his national money or currency for exchanging it to another national currency. Currency trading is the transfer of funds from one country to another.

E1.15: Calculate using money and convert from one currency to another. 

To convert a currency from one currency to another, you can follow the steps below for calculating how much money can be gained after giving any amount of money you want. 

Step 1: Firstly, estimate the amount of money you wish to exchange. 

Step 2: Next, find the exchange rate of the currency you want to convert. 

Step 3: Now, you can calculate the money you will have after you exchange by dividing the money you are having with the current rate. 

After following these steps, anyone can exchange their money. Then you can contact the broker, bank or use currency exchange services to exchange the money. By this method, the currency can be converted to another currency.

Worked examples on foreign exchange

Example 1: Shubham has Rs. $$44000$$ that he wants to convert into $$\text{USD}$$. How much money in USD will he receive? $$(1\text{ USD}=\text{ Rs.}72.98)$$

Step 1: Find the cost of $$\text{Rs. }1$$ with respect to USD.

Cost of $$1$$ rupee is $$\frac{1}{72.98}$$.

Step 2: Calculate the received money by Ram.

$$\frac{1}{72.98} \cdot 44000=602.905$$ USD.

So, Ram will receive $$602.905$$ USD for Rs. $$44000$$.

Example 2: Ritika converts $$80,000$$ USD into the Euros at an exchange rate of $$1 \frac{\text{EUD}}{\text{USD}}=\$1.16$$. When the currency rate rises to $$1 \frac{\text{EUD}}{\text{USD}}=\$1.89$$, she changes her money back into USD. How much money did Ritika make from her currency trades?

Step 1: Find the cost of $$1$$ dollar with $$1\frac{\text{EUD}}{\text{USD}}=\$1.16$$.

$$1 \frac{\text{EUD}}{\text{USD}} =\$1.16$$. So, cost of $$1$$ dollar is $$\frac{1}{1.16}$$ Euros.

Step 2: Find the cost of $$1$$ dollar with $$1\frac{\text{EUD}}{\text{USD}}=\$1.89$$.

$$1\frac{\text{EUD}}{\text{USD}}=\$1.89$$. So, cost of $$1$$ dollar is $$\frac{1}{1.89}$$ Euros.

Step 3: Calculate the exchange money of $$80000$$ dollar with the exchange rate $$1\frac{\text{EUD}}{\text{USD}}=\$1.16$$.

$$\frac{1}{1.16} \times 80000=68965.52$$ Euros.

Step 4: Convert $$68965.52$$ Euros into the USD by using $$1\frac{\text{EUD}}{\text{USD}}=\$1.89$$.

$$68965.52 \times 1.89=130344.83$$ dollars.

Step 5: Subtraction of $$130344.83$$ and $$80000$$

$$130344.83-80000=50344.83$$ dollars.

So, Ritika will make $$50344.83$$ dollars of money from the currency trades.

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