Foreign exchange rates  (Page 2/4)

This seems obvious, but let us see how we calculated those numbers: The rate is given as ZAR per USD, or ZAR/USD such that $1,00 buys R6,0704. Therefore, we need to multiply by 1 000 to get the number of Rands per $1 000.

Mathematically,

as expected.

What if you have saved R10 000 for spending money for the same trip and you wanted to use this to buy USD? How many USD could you get for this? Our rate is in ZAR/USD but we want to know how many USD we can get for our ZAR. This is easy. We know how much $1,00 costs in terms of Rands.

As we can see, the final answer is simply the reciprocal of the ZAR/USD rate. Therefore, for R10 000 will get:

We can check the answer as follows:

Six of one and half a dozen of the other

So we have two different ways of expressing the same exchange rate: Rands per Dollar (ZAR/USD) and Dollar per Rands (USD/ZAR). Both exchange rates mean the same thing and express the value of one currency in terms of another. You can easily work out one from the other - they are just the reciprocals of the other.

If the South African Rand is our domestic (or home) currency, we call the ZAR/USD rate a “direct" rate, and we call a USD/ZAR rate an “indirect" rate.

In general, a direct rate is an exchange rate that is expressed as units of home currency per units of foreign currency, i.e., $\frac{\mathrm{Domestic\; Currency}}{\mathrm{Foreign\; Currency}}$ .

The Rand exchange rates that we see on the news are usually expressed as direct rates, for example you might see:

The exchange rate is just the price of each of the Foreign Currencies (USD, GBP and EUR) in terms of our domestic currency, Rands.

An indirect rate is an exchange rate expressed as units of foreign currency per units of home currency, i.e. $\frac{\mathrm{Foreign\; Currency}}{\mathrm{Domestic\; Currency}}$ .

Defining exchange rates as direct or indirect depends on which currency is defined as the domestic currency. The domestic currency for an American investor would be USD which is the South African investor's foreign currency. So direct rates, from the perspective of the American investor (USD/ZAR), would be the same as the indirect rate from the perspective of the South Africa investor.

Terminology

Since exchange rates are simply prices of currencies, movements in exchange rates means that the price or value of the currency has changed. The price of petrol changes all the time, so does the price of gold, and currency prices also move up and down all the time.

If the Rand exchange rate moved from say R6,71 per USD to R6,50 per USD, what does this mean? Well, it means that $1 would now cost only R6,50 instead of R6,71. The Dollar is now cheaper to buy, and we say that the Dollar has depreciated (or weakened) against the Rand. Alternatively we could say that the Rand has appreciated (or strengthened) against the Dollar.