Daily Economics, Business & Finance Study

October 22, 2026 (KST) · Day 31
Today’s Topic: An Exchange Rate Is the Relative Price of Two Currencies — Reading USD/KRW, the Base Currency, and the Quote Currency

1. Review of the Previous Lesson

Day 30 explained that credit spreads price expected credit risk, liquidity, and risk appetite in advance, while realized default rates confirm what happened later. Today, we move from interest rates and bonds to exchange rates and learn the basic language needed to compare cash flows and corporate values stated in different currencies.

2. Today’s Core Concept

An exchange rate is the price of one currency expressed in another currency. USD/KRW = 1,400 means KRW 1,400 is required to buy one U.S. dollar.

• Base currency: the first currency in the pair, whose quantity is set to one — USD
• Quote currency: the currency used to state the price of one unit of the base currency — KRW
• A rise in USD/KRW: U.S. dollar appreciation or Korean won depreciation
• A fall in USD/KRW: U.S. dollar depreciation or Korean won appreciation

Today’s objective is to read the direction of an exchange-rate quotation correctly, calculate reciprocal rates, percentage changes, bids and asks, and distinguish the effects on a company’s revenue, costs, and foreign-currency debt.

3. Concept Explanation

3-1. An Exchange Rate Is an Exchange Ratio Between Two Currencies

Bank of Korea defines an exchange rate as the exchange ratio and relative value between two currencies. Read a currency pair as follows.

\[ USD/KRW =\frac{Amount\ in\ Korean\ won}{Amount\ in\ U.S.\ dollars} \]

If USD/KRW = 1,400, then:

\[ 1USD=1{,}400KRW \]

USD is the base currency and KRW is the quote currency. EUR/USD = 1.10 means one euro is worth 1.10 U.S. dollars. Reversing the order of the currencies also takes the reciprocal of the number.

3-2. Distinguish Korean Usage From the International Currency-Pair Notation

Korean news commonly says the “won–dollar exchange rate,” but the market code is usually USD/KRW, meaning the won price of one U.S. dollar. Saying only that “the exchange rate rose” is ambiguous, so write it explicitly.

• USD/KRW rose from 1,400 to 1,450.
• The Korean won depreciated against the U.S. dollar.

Omitting the currency pair can mix up dollar appreciation and won depreciation even though they describe the same move from different sides.

3-3. The Reciprocal Reverses the Rate, but the Percentage Change Does Not Simply Reverse Sign

USD/KRW = 1,400 has the following reciprocal:

\[ KRW/USD =\frac{1}{1{,}400} =0.000714USD/KRW \]

In practice, the value may be stated per KRW 1,000 to avoid a very small number.

\[ 1{,}000KRW \div1{,}400 =0.7143USD \]

USD/KRW rises 10% from 1,400 to 1,540, the won price of one dollar rises 10%. The dollar value of one won, however, falls 9.09%.

\[ \frac{1/1{,}540}{1/1{,}400}-1 =-9.09\% \]

Because the denominator changes, reversing a currency pair does not produce a percentage change with merely the opposite sign.

3-4. The Benchmark Rate Can Differ From the Actual Conversion Rate

The rate shown in the news is generally based on the interbank foreign-exchange market, while the price actually available to an individual or company may include a bank spread and fees. As the Bank of Korea explains, the wholesale-like interbank market must be distinguished from the retail conversion market.

• Bid: the price at which a market maker or bank buys the base currency
• Ask: the price at which a market maker or bank sells the base currency
• Bid–ask spread: ask minus bid

USD/KRW = 1,398 / 1,402 means the bank buys dollars at KRW 1,398 and sells them at KRW 1,402. An exporter receiving dollars uses the bid when selling those dollars; an importer needing to pay dollars uses the ask when buying them. The actual transaction may also reflect customer-specific discounts and fees.

3-5. A Higher Exchange Rate and a Stronger Currency Are Not the Same Statement

Under Korea’s commonly used USD/KRW quote, a higher rate means a stronger dollar and a weaker won. The Bank of Korea likewise explains that a rise in the exchange rate means won depreciation and a fall means won appreciation.

“A strong dollar” may mean strength only against the won or broad strength against several major currencies. Distinguish the two.

3-6. The Same Exchange Rate Reaches a Company Through Three Channels

1. Transaction exposure: the won cash amount of foreign-currency receivables, payables, and debt changes.
2. Translation exposure: when a foreign subsidiary’s statements are converted into the group’s presentation currency, reported revenue, profit, assets, and liabilities change.
3. Economic exposure: exchange-rate changes affect competitive pricing, market share, supply chains, and long-term profitability.

A weaker won does not always benefit an exporter. Dollar revenue may rise along with dollar-denominated raw materials, freight, royalties, and foreign-currency debt; and overseas competitors may cut prices and erase the export price advantage.

3-7. Bilateral and Effective Exchange Rates Answer Different Questions

• Nominal bilateral exchange rate: compares only two currencies, as USD/KRW does.
• Nominal effective exchange rate: combines trading-partner currencies using trade weights to show a currency’s broad movement.
• Real effective exchange rate: also adjusts for differences in national price levels to complement measures of price competitiveness.

Today focuses on bilateral quotation and calculation. Effective exchange rates and purchasing power parity will follow in later lessons.

4. A Simple Numerical Example

All figures below are hypothetical learning examples, not actual company data or market forecasts.

① Dollar Receivable and Dollar Payable

Assume Company A will receive a $1 million trade receivable in three months.

\[ 1{,}000{,}000USD\times(1{,}485-1{,}350)KRW/USD =135{,}000{,}000KRW \]

When the rate rises 10%, the translated won amount increases by KRW 135 million. If the same amount were a dollar payable, the won cost would instead increase by KRW 135 million.

② Dollars Purchasable With Won

Assume KRW 100 million is converted into dollars.

\[ At\ USD/KRW\ 1{,}400 =\frac{100{,}000{,}000KRW}{1{,}400KRW/USD} =71{,}428.57USD \]

\[ At\ USD/KRW\ 1{,}500 =\frac{100{,}000{,}000KRW}{1{,}500KRW/USD} =66{,}666.67USD \]

With the same amount of won, the dollars purchasable after the rate increase fall by $4,761.90, or about 6.67%.

③ Bid and Ask

A bank quotes USD/KRW = 1,398 / 1,402 in this example.

• An exporter selling $100,000 receives: \(100{,}000\times1{,}398=KRW\ 139{,}800{,}000\)
• An importer buying $100,000 pays: \(100{,}000\times1{,}402=KRW\ 140{,}200{,}000\)
• Difference for the same $100,000: \(KRW\ 400{,}000\)

Using only the midpoint of KRW 1,400 misses the difference between the actual buying and selling prices.

④ Net Foreign-Currency Exposure

If Company B has $2 million of dollar receivables and $1.2 million of dollar payables, its net dollar asset is $800,000.

\[ Net\ dollar\ exposure =2{,}000{,}000-1{,}200{,}000 =800{,}000USD \]

When the rate rises from KRW 1,350 to KRW 1,485, the simplified increase in the won translation is:

\[ 800{,}000USD\times135KRW/USD =108{,}000{,}000KRW \]

This does not guarantee a KRW 108 million increase in net income. Settlement timing, forward hedges, accounting, taxes, and exposures to other currencies must be considered.

5. How to Use It in Equity and Company Analysis

① First Map Revenue, Costs, and Debt by Currency

Before concluding that a weaker won benefits an exporter, align the following items by currency.

foreign-currency revenue − foreign-currency cash costs − foreign-currency interest and repayments offers an initial view of directional FX exposure when estimated separately for each currency.

② Separate FX Effects From Underlying Growth

If overseas revenue rises 10% but local-currency growth is 3% and FX contributes 7%, the improvement in demand, pricing, and volume may be limited. Conversely, flat reported revenue with growth at constant currency may indicate stronger underlying operations.

Look for the following terms.

• reported growth: growth measured in the reporting currency
• constant-currency growth: growth after removing exchange-rate effects
• FX tailwind / headwind: a favorable or unfavorable effect from exchange-rate movements
• transaction gain or loss: gain or loss on foreign-currency transactions
• cumulative translation adjustment: the translation adjustment for foreign operations

③ Analyze Profit and Cash Sensitivity, Not Revenue Alone

Do not calculate an FX benefit from the dollar share of revenue alone. Subtract costs, debt, and hedges from gross exposure and connect the result through the following chain.

\[ Exchange-rate\ change \rightarrow Revenue,\ costs,\ interest,\ and\ hedge\ results \rightarrow Operating\ income\ and\ net\ income \rightarrow OCF\ and\ FCF \]

A disclosed “profit effect from a 10% FX change” can be useful, but it is usually a sensitivity based on assets, liabilities, and derivatives at a specific date. It does not fully explain long-term economic exposure in which volume, prices, and competition also change.

④ Do Not Mix Average and Period-End Rates

Income-statement revenue and expenses for a period are often translated using a rate close to the average rate, while period-end balance-sheet assets and liabilities are often translated at the closing rate. Using rates from inconsistent dates distorts growth, margins, and net-debt comparisons.

⑤ Match Currency and Date in Valuation

When comparing market capitalization, net debt, and FCF for foreign companies, use an exchange rate from the same valuation date. The currency of projected FCF must also match the currency of the discount rate. Consistency breaks if a dollar discount rate is applied directly to won cash flows or if revenue is translated at the current rate while debt is added at a historical rate.

⑥ Avoid Common Misconceptions

• A rise in USD/KRW = good news for every exporter is false.
• Higher translated revenue does not necessarily mean greater cash inflow.
• Hedging often changes the timing and range of risk rather than eliminating it.
• Look at average rates, settlement timing, pricing power, and competitor currencies—not just a point-in-time rate.
• FX is not the sole cause of earnings; it interacts with demand, prices, costs, and interest rates.

6. What to Find in Filings

Korean Companies: DART

DART provides annual, semiannual, and quarterly reports; start with the consolidated statements and the following notes.

In an annual report, prioritize the consolidated notes in III. Financial Information and connect them with sales, raw-material, and risk-management explanations in II. Business Overview. Looking only at separate financial statements can miss exposure in overseas subsidiaries.

U.S. Companies: 10-K and 10-Q

SEC EDGAR: check the following locations.

• 10-K Item 7 / 10-Q MD&A: reported and constant-currency growth, FX tailwinds and headwinds
• 10-K Item 7A: Quantitative and Qualitative Disclosures About Market Risk: foreign-exchange sensitivity and assumptions
• Item 8 / 10-Q Part I, Item 1 notes: foreign currency, derivatives and hedging, fair value, segment and geographic information
• Accumulated Other Comprehensive Income: foreign currency translation adjustment
• Risk Factors: currency volatility, capital controls, remittance, and overseas-business risks

Item 7A is a common place to find sensitivity analysis based on a stated percentage move in exchange rates and a discussion of hedging. Companies use different assumptions, included currencies, and hedge scopes, so match dates and methods rather than comparing the numbers mechanically.

Market Data Outside Company Filings

Company filings may not contain a continuous market-wide FX history or the actual retail rate available to a particular customer. Check these separately.

• Bank of Korea: Foreign Exchange Markets and Exchange Rates: exchange-rate system and basic definitions
• Bank of Korea Economic and Financial Snapshot: won–dollar and other market indicators with basis notes
• FRED DEXKOUS: a daily series stated as Korean won per one U.S. dollar
• BIS exchange-rate statistics: bilateral and effective exchange rates

Keep the market rate, the company’s actual settlement rate, the accounting translation rate, and a bank’s customer rate separate.

7. Key Takeaways

• An exchange rate is the relative price of one currency stated in another.
• USD/KRW = 1,400 means KRW 1,400 per U.S. dollar; USD is the base currency and KRW is the quote currency.
• A rise in USD/KRW means a stronger dollar and weaker won; a fall means a weaker dollar and stronger won.
• Reversing the currency pair takes the reciprocal, and the percentage change does not simply reverse sign.
• The actual transaction price can differ from a news benchmark because of bids, asks, and fees.
• Company analysis should separate transaction, translation, and economic exposure and align revenue, costs, debt, and hedges by currency.
• Do not mix average and closing rates or market and company-applied rates.

8. Three Review Questions

Question 1

USD/KRW rose from 1,450 to 1,500. Explain what the quote means and the direction of the dollar and won.

Question 2

A company has $2 million of dollar receivables and $1.2 million of dollar payables. If USD/KRW rises from 1,350 to 1,485, by how much does the simplified won translation of the net foreign-currency exposure increase? Assume there is no hedge.

Question 3

A bank quotes USD/KRW = 1,397 / 1,403. Calculate the won an exporter receives when selling $500,000 and the won an importer pays when buying $500,000.

Answers and Explanations

Answer 1

The won price of one dollar rose from KRW 1,450 to KRW 1,500. The dollar appreciated against the won, and the won depreciated against the dollar.

Answer 2

The net dollar asset is $800,000.

\[ (2{,}000{,}000-1{,}200{,}000)USD \times(1{,}485-1{,}350)KRW/USD =108{,}000{,}000KRW \]

The simplified won translation increases by KRW 108 million. The actual effect on net income may differ because of settlement timing, accounting, taxes, and other exposures.

Answer 3

The exporter sells dollars to the bank and therefore uses the KRW 1,397 bid.

\[ 500{,}000USD\times1{,}397KRW/USD =698{,}500{,}000KRW \]

The importer buys dollars from the bank and therefore uses the KRW 1,403 ask.

\[ 500{,}000USD\times1{,}403KRW/USD =701{,}500{,}000KRW \]

The difference is KRW 3 million. Customer-specific fees and discounts may apply separately.

Next Lesson — Day 32:
“Why Exchange Rates Move — Connecting Interest-Rate Differentials, Growth, Trade Balances, Capital Flows, and Risk Appetite”