diff --git a/README.md b/README.md
index b4f6791..e50f2a9 100644
--- a/README.md
+++ b/README.md
@@ -40,7 +40,8 @@ In your `settings.json`, add the following setting:
 }
 ```
 
-The `arguments` key is optional.  
+The `arguments` key is optional. VS Code internal variables like `${file}` are resolved. A complete list of
+resolvable variables can be found [here](https://github.com/DominicVonk/vscode-variables/tree/v1.0.1?tab=readme-ov-file).
 
 So, for instance, for `Terraform` code, you can use these settings:
 
@@ -112,4 +113,3 @@ also supported.
 ## TODO
 
  * Formatter-specific working directory override
- * Variable substitution in formatter settings (for instance: `"${workspaceFolder}/tools/format-my-blub-file.sh"`)
diff --git a/src/externalTextDocumentFormattingProvider.ts b/src/externalTextDocumentFormattingProvider.ts
index cc0fe3f..f74ba64 100644
--- a/src/externalTextDocumentFormattingProvider.ts
+++ b/src/externalTextDocumentFormattingProvider.ts
@@ -4,6 +4,7 @@ import * as etf from './externalTextFormatter';
 import * as path from 'path';
 import * as process from 'process';
 import * as config from './configuration';
+import { resolveVariables } from './resolveVariables';
 
 export const create: () => vscode.DocumentFormattingEditProvider =
     () => createFormattingProvider(
@@ -22,10 +23,11 @@ const getSettingsForDocument: (doc: vscode.TextDocument) => etf.FormatterSetting
             throw new Error(`Bad settings for externalFormatters.${doc.languageId}`);
         }
         const [, { command, arguments: args }] = applicableSelectorAndConfig;
+        const resolvedArgs = args?.map((arg) => resolveVariables(arg));
 
         return {
             command,
-            args,
+            resolvedArgs,
             workDir: documentDir(doc) || rootFolder() || process.cwd()
         };
     };
diff --git a/src/resolveVariables.ts b/src/resolveVariables.ts
new file mode 100644
index 0000000..eef47a3
--- /dev/null
+++ b/src/resolveVariables.ts
@@ -0,0 +1,185 @@
+// The following code is a slight modification of code that was published by Dominic Vonk on
+// GitHub (https://github.com/DominicVonk/vscode-variables, tag: v1.0.1) under the MIT license.
+// A copy of the license is supplied below.
+//
+// MIT License
+// Copyright (c) 2021 Dominic Vonk
+// Permission is hereby granted, free of charge, to any person obtaining a copy of this software
+// and associated documentation files (the "Software"), to deal in the Software without
+// restriction, including without limitation the rights to use, copy, modify, merge, publish,
+// distribute, sublicense, and/or sell copies of the Software, and to permit persons to whom the
+// Software is furnished to do so, subject to the following conditions:
+// The above copyright notice and this permission notice shall be included in all copies or
+// substantial portions of the Software.
+// THE SOFTWARE IS PROVIDED "AS IS", WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED,
+// INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
+// PURPOSE AND NONINFRINGEMENT. IN NO EVENT SHALL THE AUTHORS OR COPYRIGHT HOLDERS BE LIABLE
+// FOR ANY CLAIM, DAMAGES OR OTHER LIABILITY, WHETHER IN AN ACTION OF CONTRACT, TORT OR
+// OTHERWISE, ARISING FROM, OUT OF OR IN CONNECTION WITH THE SOFTWARE OR THE USE OR OTHER
+// DEALINGS IN THE SOFTWARE.
+
+
+import * as os from "os";
+import * as process from "process";
+import * as vscode from "vscode";
+
+export function resolveVariables(string: string, recursive = false) {
+    const workspaceFolders = vscode.workspace.workspaceFolders;
+    const activeFile = vscode.window.activeTextEditor?.document;
+    const absoluteFilePath = activeFile?.uri.fsPath;
+    const workspace = vscode.workspace.workspaceFolders?.[0];
+    const activeWorkspace = workspaceFolders?.find((workspace) =>
+        absoluteFilePath?.startsWith(workspace.uri.fsPath)
+    )?.uri.fsPath;
+    const homeDir = os.homedir();
+
+    // ${userHome} - /home/your-username
+    string = string.replace(/\${userHome}/g, homeDir);
+
+    // ${workspaceFolder} - /home/your-username/your-project
+    string = string.replace(/\${workspaceFolder}/g, workspace?.uri.fsPath ?? "");
+
+    // ${workspaceFolder:name} - /home/your-username/your-project2
+    string = string.replace(/\${workspaceFolder:(.*?)}/g, function (_, name) {
+        return (
+            workspaceFolders?.find((workspace) => workspace.name === name)?.uri
+                .fsPath ?? ""
+        );
+    });
+
+    // ${workspaceFolderBasename} - your-project
+    string = string.replace(
+        /\${workspaceFolderBasename}/g,
+        workspace?.name ?? ""
+    );
+
+    // ${workspaceFolderBasename:name} - your-project2
+    string = string.replace(
+        /\${workspaceFolderBasename:(.*?)}/g,
+        function (_, name) {
+            return (
+                workspaceFolders?.find((workspace) => workspace.name === name)?.name ??
+                ""
+            );
+        }
+    );
+
+    // ${file} - /home/your-username/your-project/folder/file.ext
+    string = string.replace(/\${file}/g, absoluteFilePath ?? "");
+
+    // ${fileWorkspaceFolder} - /home/your-username/your-project
+    string = string.replace(/\${fileWorkspaceFolder}/g, activeWorkspace ?? "");
+
+    // ${relativeFile} - folder/file.ext
+    string = string.replace(
+        /\${relativeFile}/g,
+        absoluteFilePath?.substring(activeWorkspace?.length ?? 0) ?? ""
+    );
+
+    // ${relativeFileDirname} - folder
+    string = string.replace(
+        /\${relativeFileDirname}/g,
+        absoluteFilePath?.substring(
+            activeWorkspace?.length ?? 0,
+            absoluteFilePath?.lastIndexOf(os.platform() === "win32" ? "\\" : "/")
+        ) ?? ""
+    );
+
+    // ${fileBasename} - file.ext
+    string = string.replace(
+        /\${fileBasename}/g,
+        absoluteFilePath?.split("/")?.pop() ?? ""
+    );
+
+    // ${fileBasenameNoExtension} - file
+    string = string.replace(
+        /\${fileBasenameNoExtension}/g,
+        absoluteFilePath?.split("/").pop()?.split(".")?.shift() ?? ""
+    );
+    // ${fileDirname} - /home/your-username/your-project/folder
+    string = string.replace(
+        /\${fileDirname}/g,
+        absoluteFilePath?.split("/")?.slice(0, -1)?.join("/") ?? ""
+    );
+
+    // ${fileExtname} - .ext
+    string = string.replace(
+        /\${fileExtname}/g,
+        absoluteFilePath?.split(".")?.pop() ?? ""
+    );
+
+    // ${lineNumber} - line number of the cursor
+    string = string.replace(
+        /\${lineNumber}/g,
+        (vscode.window.activeTextEditor
+            ? vscode.window.activeTextEditor.selection.start.line + 1
+            : 0
+        ).toString()
+    );
+
+    // ${selectedText} - text selected in your code editor
+    string = string.replace(/\${selectedText}/g, function () {
+        return (
+            vscode.window.activeTextEditor?.document.getText(
+                new vscode.Range(
+                    vscode.window.activeTextEditor.selection.start,
+                    vscode.window.activeTextEditor.selection.end
+                )
+            ) ?? ""
+        );
+    });
+
+    // ${cwd} - current working directory
+    string = string.replace(
+        /\${cwd}/g,
+        absoluteFilePath?.split("/")?.slice(0, -1)?.join("/") ?? ""
+    );
+
+    // ${execPath} - location of Code.exe
+    string = string.replace(/\${execPath}/g, process.execPath);
+
+    // ${pathSeparator} - / on macOS or linux, \ on Windows
+    string = string.replace(
+        /\${pathSeparator}/g,
+        os.platform() === "win32" ? "\\" : "/"
+    );
+
+    // ${/} - short for ${pathSeparator}
+    string = string.replace(/\${\/}/g, os.platform() === "win32" ? "\\" : "/");
+
+    // ${env:VARIABLE} - environment variable
+    string = string.replace(/\${env:(.*?)}/g, function (_match, captured) {
+        return process.env[captured] ?? "";
+    });
+
+    // ${config:VARIABLE} - configuration variable
+    string = string.replace(/\${config:(.*?)}/g, function (_match, captured) {
+        return vscode.workspace.getConfiguration().get(captured, "");
+    });
+
+    if (string.match(/\${command:(.*?)}/)) {
+        // async
+        while (string.match(/\${command:(.*?)}/)) {
+            const command = string.match(/\${command:(.*?)}/)![1];
+            try {
+                const result = vscode.commands.executeCommand(command);
+                string = string.replace(
+                    /\${command:(.*?)}/,
+                    result !== undefined ? result + "" : ""
+                );
+            } catch (error) {
+                string = string.replace(/\${command:(.*?)}/, "");
+            }
+        }
+    }
+
+    if (
+        recursive &&
+        string.match(
+            /\${(workspaceFolder|workspaceFolder:(.*?)|workspaceFolderBase:(.*?)|workspaceFolderBasename|fileWorkspaceFolder|relativeFile|fileBasename|fileBasenameNoExtension|fileExtname|fileDirname|cwd|pathSeparator|lineNumber|selectedText|env:(.*?)|config:(.*?)|command:(.*?)|userHome)}/
+        )
+    ) {
+        string = resolveVariables(string, recursive);
+    }
+    return string;
+};