CALCULATION OF EXCHANGE RATES AND KEY FACTORS AFFECTING FOREIGN EXCHANGE

CALCULATION OF EXCHANGE RATES AND KEY FACTORS AFFECTING FOREIGN EXCHANGE

An exchange rate is a measure used to convert one currency to another. The exchange rates keep on changing now, and then as money continues to be traded. Its exchange rate highly determines a country’s economic stability. Therefore, knowing calculating exchange rates will lessen one’s chances of being overcharged. Also, examining factors affecting exchange rates will help to understand a country’s economic direction.

To calculate the exchange rate, first, you need to estimate the amount of money you have. Second, you need to check the exchange rate of the currency you want to convert. These rates can easily be found in financial or banking sites. You can use the formula; c=a*b. where a is the amount of capital you have, b is the exchange rate while c is the amount of money you will have after the exchange. (Mitchell, 2020)Assuming you want to change euros to dollars, and you have 1000 Euros, and the exchange rate is 1.146. Then you will multiply $1000 by 1.146 to get 1,146 USD.

Below are some of the factors that have an impact on exchange rates.

Inflation Rates. A differential in inflation rates affects exchange rates. A country experiencing a low inflation rate will automatically have a high currency value. Some of the countries in the 20th century that are seen to exhibit low inflation are U.S. Canada and Japan. (Twin, 2020) Countries with a high inflation rate will have a weak currency value. This usually results in high-interest rates.

Economic and Political Stability. Typically, countries with strong economic and political performance have secure currency value. (Compareremit.com, 2020) A country that is politically and economically stable will easily attract foreign investors. An increase in foreign capital will automatically raise the value of the currency. Countries with high political and economic risk can easily cause a loss in confidence hence may face depreciation at different rates, whereas countries that support foreign investment will have a high currency value..

Change in Interest Rates. Interest rates, exchange rates, and inflation are all interconnected. High-interest rates offer lenders a high return value. Therefore high-interest rates attract foreign investors, thereby raising the exchange rate. The vice versa is also true. Low-interest rates directly draw investors away, causing a low exchange rate.

Account Deficit. The steadiness of trade and earnings on foreign investments usually reflects in a country account balance. A country faces a deficit when it’s spending more than it is making. A state requires to do more exports and supplies of their products to gain more foreign currency. (Twin, 2020) A significant account deficit causes a depreciation in the currency value, thereby lowering the exchange rate.

Presence of speculation. When a country’s currency value is expected to rise, more investors will want to invest in that country to make high profits. (Compareremit.com, 2020) This will cause a high demand for that currency. Therefore an automatic raise in currency value will be seen in that country—consequently, a rise in the exchange rate.

In conclusion, all the above factors affect the currency exchange rate. A high exchange rate will works in favor of a country’s economic growth, while a low exchange rate will decrease its chances of stabilizing.

Reference

Twin, A. (2020). 6 Factors That Influence Exchange Rates. [online] Investopedia. Available at: https://www.investopedia.com/trading/factors-influence-exchange-rates/ [Accessed 6 March. 2020].

8 Key Factors that Affect Foreign Exchange Rates. (2020). Retrieved 6 March 2020, from https://www.compareremit.com/money-transfer-guide/key-factors-affecting-currency-exchange-rates/

Mitchell, C. (2020). How to Calculate an Exchange Rate. Retrieved 6 March 2020, from https://www.investopedia.com/articles/forex/090314/how-calculate-exchange-rate.asp