Forex Glossary

Exchange Rate

Have you ever wondered why the same amount of money in one country can seem like so much more or less in another, Let’s talk about exchange rate

This term is everywhere, on the news, in conversations about the economy, and even in the decisions people make daily when they send money abroad or trade goods across borders. 

But what is it? Why does it matter so much, and how does it even work? 

If you’re curious about all of this, you’re in the right place and we will make you understand extensively.

What Is an Exchange Rate?

It is the value of one country’s currency compared to another. It’s like a price tag that tells you how much of one currency you need to get a unit of another. 

For example, if the exchange rate between the US dollar (USD) and the Nigerian naira (NGN) is 1 USD = 1,600 NGN, it means you need 1,600 naira to buy 1 dollar.

Why Does the Exchange Rate Exist?

The world is full of different currencies, like the dollar, euro, naira, and yen. Because each country has its currency, people, businesses, and governments need a way to trade between them. 

The exchange rate acts as the “middleman,” making it possible for trade, travel, and investment to happen smoothly across borders.

How Does the Exchange Rate Work?

The exchange rate is not fixed; it can change every minute! These changes happen because of supply and demand. Let’s take for instance,

If more people want dollars than naira, the value of the dollar goes up, and the naira becomes weaker.

On the other hand, if more people want naira, its value increases, and the dollar weakens.

Types of Exchange Rates

There are two main types:

1. Fixed Exchange Rate

Some countries decide to change their currency to another currency. For example, the Central Bank of a country may set a fixed rate of 1 USD = 750 NGN and ensure it doesn’t change.

2. Floating Exchange Rate

In this system, the value of a currency is determined by supply and demand in the market. Most major currencies, like the US dollar and euro, use this system.

Factors That Affect Exchange Rates

Why does the exchange rate change? The factors are:

1. Economic Stability

Countries with strong and stable economies usually have stronger currencies.

2. Interest Rates

Higher interest rates can attract foreign investors, increasing demand for that country’s currency.

3. Inflation

If prices are rising too fast (inflation), a currency may lose its value compared to others.

4. Political Events

Elections, wars, or government policies can affect how people feel about a country’s currency.

5. Trade Balances

If a country exports more than it imports, its currency is likely to strengthen because other countries are buying more of its goods.

Why Is the Exchange Rate Important?

Exchange rates affect everyone, even if you’ve never left your country or traded in foreign money. 

1. Travelers

Imagine you’re going from Nigeria to the USA. The exchange rate determines how much naira you need to convert into dollars for your trip.

2. Businesses

Companies buying or selling goods overseas rely on exchange rates to price their products.

3. Everyday Purchases

If a country imports goods like fuel or electronics, changes in the exchange rate can make those items more expensive or cheaper.

3. Remittances

When people send money to family abroad, the exchange rate determines how much the recipient gets.

Exchange Rates of 5 Countries

Exchange rates show the value of one country’s currency compared to another. 

Using updated rates, below is how currencies compare to the Nigerian Naira (NGN):

1. United States (USD): 1 USD = 1,559.52 NGN

2. European Union (EUR): 1 EUR = 1,607.80 NGN

3. United Kingdom (GBP): 1 GBP = 1,903.14 NGN

4. China (CNY): 1 CNY = 213.60 NGN

5. South Africa (ZAR): 1 ZAR = 83.55 NGN

Now, let’s learn how to calculate currency conversions using these rates.

How to Calculate Exchange Rates

Below are three common scenarios, explained with simple examples to help you understand the math:

1. Converting Foreign Currency to Nigerian Naira (NGN)

To convert foreign currency to naira, multiply the amount by the exchange rate.

Example:
You have 100 USD and want to know how much it is in naira.

Formula:
Amount in NGN = Foreign Currency x Exchange Rate

Calculation:
100 USD x 1,559.52 NGN = 155,952 NGN

2. Converting Nigerian Naira (NGN) to Foreign Currency

To convert naira to a foreign currency, divide the amount in naira by the exchange rate.

Example:
You have 500,000 NGN and want to convert it to British Pounds (GBP).

Formula:
Amount in Foreign Currency = Amount in NGN ÷ Exchange Rate

Calculation:
500,000 NGN ÷ 1,903.14 NGN = 262.69 GBP

3. Converting Between Two Foreign Currencies Using Naira

If there’s no direct rate between two currencies, you can use naira as an intermediary.

Example:
Convert 50 EUR to Chinese Yuan (CNY) using the following rates:
1 EUR = 1,607.80 NGN
1 CNY = 213.60 NGN

Step 1: Convert Euros to Naira.
50 EUR × 1,607.80 NGN = 80,390 NGN

Step 2: Convert Naira to Yuan.
80,390 NGN ÷ 213.60 NGN = 376.48 CNY

Conclusion

The exchange rate is like a bridge connecting economies, people, and businesses across the world. 

Whether you’re traveling, sending money abroad, or simply curious about how the world works, understanding the exchange rate is key. 

Now that you know the basics, you’re one step closer to mastering this essential Forex.

Leave a Reply

Reach us on WhatsApp
1
This website uses cookies and asks your personal data to enhance your browsing experience. We are committed to protecting your privacy and ensuring your data is handled in compliance with the General Data Protection Regulation (GDPR).

Join waitlist

Stay equipped and build your knowledge around the financial market. Get notified when we have fully launched.

coming soon app