Chapter 2

Mastering the Basics of International Finance

In This Chapter

arrow Defining exchange rates

arrow Understanding the difference between different types of exchange rates

arrow Mastering the correct terminology related to changes in exchange rates

arrow Figuring out the simple math of conversions, cross rates, and spreads

Exchange rates are the cornerstone of international finance. An exchange rate tells you the relative price of one currency in terms of another. In this chapter, you get familiar with the different types of exchange rates, such as nominal, real, and effective exchange rates. Additionally, although this chapter doesn’t discuss why exchange rates change (turn to Chapters 5, 6, and 7 for that information), it talks about the proper terminology to use when exchange rates change. The chapter also includes a little math, showing both how to convert an amount of money from one currency into another one and how to calculate the percent change in exchange rates, cross rates, and bid–ask spreads.

Making the Exchange: Exchange Rates

An exchange rate is nothing but a relative price — for example, ...

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