Applied International Finance I

Review of Foreign Exchange Rates

A foreign exchange (FX) rate is, simply, the price of one currency in terms of another. An FX rate between US dollars and British pounds can be expressed as either (a) US dollars per British pound or (b) British pounds per US dollar. We use the notation 2 $/£ to mean 2 US dollars ($2) per British pound, or that $2 will buy 1 British pound. Equivalently, we can use the reciprocal, 0.50 £/$, which means 0.50 British pounds (£0.50) per US dollar, or that £0.50 will buy 1 US dollar.

An FX rate expresses the price of the “denominator currency” in terms of the “numerator currency.” The numerator currency is called the pricing currency, or the terms currency. The denominator currency is sometimes called the base currency ...