Understanding Exchange Rate Fluctuations: A Practical Guide

You can find exchange rates in a business newspaper.

A foreign exchange rate is the cost to exchange one country's currency for another country's currency. Financial publications and currency dealers quote exchange rates in currency pairs because you are simultaneously buying one currency while selling another when you exchange currencies. Exchange rates fluctuate daily in financial markets, which changes the value of items held in a foreign currency, such as a foreign bank account, in terms of your home currency. You can calculate the effects of exchange rate changes of an item in one currency in terms of another currency.

Step 1

Determine a currency in which an item is currently valued and the amount of the item in that currency. For example, assume you have a bank account with a balance of 10,000 euros.

Step 2

Determine a second currency, such as your home currency, in terms of which you want to determine the change in the item's value. For example, determine the change in the bank account's value in terms of U.S. dollars.

Step 3

Find the exchange rate between the two currencies on any financial website that provides financial market data or in a business newspaper. For example, assume the exchange rate between euros and U.S. dollars is: one euro equals $1.43.

Step 4

Multiply the amount of the item by the exchange rate to determine its value in the second currency. For example, multiply 10,000 euros by an exchange rate of $1.43, which equals $14,300. This means the bank account is worth $14,300 in U.S. dollars before an exchange rate change.

Step 5

Determine the new exchange rate after the exchange rate has changed. For example, assume the exchange rate has changed to: 1 euro equals $1.45.

Step 6

Multiply the original amount of the item by the new exchange rate to calculate its new value in terms of the second currency. For example, multiply 10,000 euros by the new exchange rate of $1.45, which equals $14,500. This means the bank account has increased in value to $14,500 in U.S. dollars as a result of the exchange rate change.