Interpreting Foreign Exchange Rate Charts

Foreign exchange charts typically look like the one produced by the Pacific Exchange Rate Service. You can always get a current, up to date exchange rate chart at the Pacific Exchange Rate Services Todays Exchange Rates page. Lets recreate and reference the  first five entries of the exchange rate chart from September 10, 2003, below for the purposes of this explanation. Foreign Exchange Chart Example from  September 10, 2003 Code Country Units/USD USD/Unit Units/CAD CAD/Unit ARP Argentina (Peso) 2.9450 0.3396 2.1561 0.4638 AUD Australia (Dollar) 1.5205 0.6577 1.1132 0.8983 BSD Bahamas (Dollar) 1.0000 1.0000 0.7321 1.3659 BRL Brazil (Real) 2.9149 0.3431 2.1340 0.4686 CAD Canada (Dollar) 1.3659 0.7321 1.0000 1.0000 The first two columns of the chart contain the country code, country, and country name for their national currencies.  The third column has the title Units/USD and compares each of the five currencies to the U.S. Dollar. The base of comparison for these exchange rates is the U.S. Dollar. In fact, the base for comparison will normally be the currency given after the forward slash (/). The base of comparison is generally dictated by whatever country you are in, so Americans use the U.S. Dollar as a base, and Canadians generally use the Canadian Dollar. Here we are given exchange rates for both. Interpreting Foreign Exchange Charts According to this foreign exchange chart, on September 10, 2003, 1 U.S. Dollar was worth 1.5205 Australian Dollars (see row 3, column 3) and according to the same logic, 1 U.S. Dollar was also worth 2.9149 Brazilian Real (see row 5, column 3). The fourth column has the column USD/Units. Under this category, each currency listed in column 1 is used as the base for comparison. So the figure in row 2, column 4 reads 0.3396 USD/Unit, which should be interpreted as 1 Argentinean Peso is worth 0.3396 U.S. Dollars or less than 34 U.S. cents. Using this same logic, the Canadian Dollar is worth 73 U.S. cents as indicated by the figure 0.7321 in row 6, column 4. Columns 5 and 6 are to be interpreted the same as columns 3 and 4, except now the base for comparison is the Canadian Dollar in column 5 and column 6 indicates how many Canadian Dollars you would get for 1 unit of each countrys currency. We should not be surprised to see that 1 Canadian Dollar is worth 1 Canadian Dollar, as shown by the number 1.0000 on the bottom right corner of the chart. Now that you have the basics of understanding foreign exchange charts, lets go a little deeper. The Property of Exchange Rates Exchange rates must have the following property:  Y-to-X exchange rate 1 / X-to-Y exchange rate. According to our chart, the  American-to-Canadian exchange rate is 1.3659 as 1 U.S. Dollar can be exchanged for $1.3659 Canadian (so here the base for comparison is the U.S. Dollar). Our relationship implies that 1 Canadian Dollar must be worth (1 / 1.3659) U.S. Dollars. Using our calculator we find that (1 / 1.3659) 0.7321, so the Canadian-to-American exchange rate is 0.7321, which is the same as the value in our chart in row 6, column 4. So the relationship does indeed hold. Other Observations: Opportunities for Arbitrage From this chart, we can also see if there are any opportunities for arbitrage. If we exchange 1 U.S. Dollar, we can get 1.3659 Canadian. From the Units/CAD column, we see that we can exchange 1 Canadian dollar for 2.1561 Argentinean Real. So well exchange our 1.3659 Canadian for Argentinean currency and receive 2.9450 Argentinean Real (1.3659*2.1561 2.9450). If we then turn around and exchange our 2.9450 Argentinean Real for U.S. Dollars at the rate of .3396, we will receive 1 U.S. Dollar in return (2.9450*0.3396 1). Since we started with 1 U.S. Dollar, we have not made any money from this currency cycle so there are no arbitrage profits.