How can we calculate the implied exchange rate between the Canadian dollar and the euro?
To calculate the implied exchange rate between the Canadian dollar and the euro, we need to use the given exchange rates for the euro to U.S. dollar (USD) and the Canadian dollar to USD.
Given that the exchange rate between the euro and the U.S. dollar is $1.36 per euro and the exchange rate between the Canadian dollar and the U.S. dollar is U.S. $0.72 per Canadian dollar, we can find the implied exchange rate between the Canadian dollar and the euro.
We first need to convert the given exchange rate of EUR to USD to CAD to USD. Since 1 euro is equal to 1.36 U.S. dollars, we can calculate how much 1 euro is in Canadian dollars by dividing 1.36 by the given exchange rate between the Canadian dollar and the U.S. dollar, which is 0.72.
So, 1 euro is equal to 1.36 / 0.72 = 1.88 in Canadian dollars. Therefore, the implied exchange rate between the Canadian dollar and the euro is C$1.88 per euro.
Understanding the Calculation:
Step 1: Convert the exchange rate between EUR and USD to CAD and then to USD. 1 euro is equivalent to $1.36 USD.
Step 2: Determine the value of 1 euro in terms of Canadian dollars by dividing 1.36 by the exchange rate between the Canadian dollar and the U.S. dollar, which is $0.72 USD.
Step 3: Calculate the implied exchange rate between the Canadian dollar and the euro, which is C$1.88 per euro.
By following these steps, we can determine the implied exchange rate between the Canadian dollar and the euro based on the given exchange rates for EUR to USD and CAD to USD. This calculation is essential for understanding the relative value of different currencies and making informed decisions in international trade and finance.
The implied exchange rate provides insights into the relationships between different currencies and helps individuals and businesses evaluate the competitiveness of prices in international markets. Understanding how exchange rates are calculated and comparing them can also assist in identifying potential arbitrage opportunities and managing foreign exchange risk.
In conclusion, the process of calculating the implied exchange rate between the Canadian dollar and the euro demonstrates the interconnectedness of global currencies and the importance of exchange rate dynamics in the modern economy.