The exchange rate represents the value of one currency in relation to another. It determines how much of one currency can be exchanged for another, impacting international trade, investments, and cross-border transactions.
Simple Example: XYZ Corp is expanding into Mexico and needs to pay a supplier in Mexican pesos (MXN). They have $100,000 in U.S. dollars (USD) and want to convert this amount to MXN at the current exchange rate of 20.1234. XYZ Corp will receive 2,012,340 MXN for their $100,000.
Numerical Breakdown:
XYZ Corp has $100,000 USD and the current USD/MXN exchange rate is 20.1234.
To convert USD to MXN:
100,000 × 20.1234 = 2,012,340 MXN
If the exchange rate increases by 10 pips to 20.1244, the new amount XYZ Corp would receive is:
100,000 × 20.1244 = 2,012,440 MXN
This results in an additional 100 MXN due to the 10-pip increase in the exchange rate.
