Question

A U.S. dollar costs 7.5 Norwegian kroner, but the same dollar can be purchased for 1.25 Swiss francs. What is the Norwegian krone/Swiss franc exchange rate?

Short answer

The Norwegian krone/Swiss franc exchange rate is 6 Norwegian kroner for 1 Swiss franc.

Step-by-step solution

Determine the unit cost of each currency in terms of the U.S. dollar

According to the given information, 1 U.S. dollar costs 7.5 Norwegian kroner and can be purchased for 1.25 Swiss francs. Therefore, the unit cost of each currency in terms of the U.S. dollar is 7.5 kroner per dollar and 1.25 francs per dollar.

Calculate the exchange rate between Norwegian kroner and Swiss francs

To find the Norwegian krone to Swiss franc exchange rate, divide the number of kroner per dollar (7.5) by the number of francs per dollar (1.25).

Compute the exchange rate

Divide the cost in Norwegian kroner by the cost in Swiss francs to find the exchange rate: \( \frac{7.5 \text{ Norwegian kroner}}{1.25 \text{ Swiss francs}} = 6 \text{ Norwegian kroner/Swiss franc} \).

Key concepts

International Economics

International economics is a fascinating field that studies how countries interact through trade, investment, and finance. One fundamental aspect of this interaction is the exchange of currencies, which enables global trade. Currency exchange rates are determined by a multitude of factors including economic stability, interest rates, and geopolitical events. An understanding of exchange rates is vital for businesses and investors who engage in international transactions.

In our exercise example, the relationship between the U.S. dollar, Norwegian kroner, and Swiss francs illustrates how exchange rates are needed to conduct trade between countries. The U.S. dollar serves as a reference point, showing the value of Norwegian kroner and Swiss francs in terms of dollars, and ultimately, the rate at which these currencies can be exchanged for each other. This interconnectedness of currencies reflects the intricacies of international economics, where currencies play a key role in balancing trade and investment flows.

Currency Conversion

Currency conversion is an essential process for anyone dealing with more than one currency. It involves the calculation of the value of one currency in terms of another. Travelers, international students, businesses, and investors regularly convert money from one currency to another. The conversion rate is determined by the foreign exchange market and fluctuates based on supply and demand for different currencies.

The step by step analysis in our exercise breaks down the conversion process, helping students grasp how to determine the value of one currency against another. In this case, understanding how many Norwegian kroner equate to Swiss francs is critical for anyone engaging in transactions between these two currencies. Being proficient in currency conversions is a beneficial skill, especially in a world that is increasingly globalized and financially interconnected.

Foreign Exchange Market

The foreign exchange market, or forex, is a dynamic and global marketplace where currencies are traded. It's the largest financial market in the world, with trillions of dollars' worth of transactions occurring each day. The market determines the exchange rates for currencies around the globe based on supply and demand, as well as on the expectation of future market conditions.

The calculation of the Norwegian krone to Swiss franc exchange rate in our exercise is a miniature model of what happens in the forex market every moment. Prices change frequently as traders buy and sell currencies in response to news, economic reports, and other factors. It's a decentralized market, functioning 24 hours a day, distinct from other financial markets that have specific hours of operation. The forex market is instrumental for businesses, banks, governments, and individuals to convert their home currency into foreign currency for a variety of purposes, from international trade to tourism.