Fundamentals of Financial Management (Concise 6th Edition)

544 Part 6 Working Capital Management, Forecasting, and Multinational Financial Management

one unit of the foreign currency is called a direct quotation. Thus, to a person who

considers the United States to be “home,” American terms represent a direct quo-

tation. On the other hand, the foreign currency price of one unit of the home currency

is called an indirect quotation. European terms represent indirect quotations to

people in the United States. Note that if the perspective changes and the “home”

currency is no longer the U.S. dollar, the designations of direct and indirect will

change. For the remainder of this chapter unless speci! cally stated otherwise, we

will assume that the United States is the “home” country and thus that the U.S.

dollar is the home currency.

Direct Quotation

The home currency price

of one unit of the foreign

currency.

Direct Quotation

The home currency price

of one unit of the foreign

currency.

Indirect Quotation

The foreign currency price

of one unit of the home

currency.

Indirect Quotation

The foreign currency price

of one unit of the home

currency.

Tabl e 17 - 2 Key Currency Cross Rates

USDollar

(1)

Euro

(2)

Pound

(3)

SFranc

(4)

Peso

(5)

Yen

(6)

CdnDlr

(7)

Canada 0.9919 1.5644 1.9655 0.9681 0.0954 0.0096 —

Japan 103.44 163.15 204.99 100.96 9.9483 — 104.29

Mexico 10.398 16.400 20.605 10.149 — 0.1005 10.484

Switzerland 1.0246 1.6160 2.0303 — 0.0985 0.0099 1.0330

United Kingdom 0.5046 0.7959 — 0.4925 0.0485 0.0049 0.5088

Euro 0.6340 — 1.2564 0.6188 0.0610 0.0061 0.6392

United States — 1.5772 1.9816 0.9760 0.0962 0.0097 1.0082

Note: Column 1 shows how many units of each foreign currency a U.S. dollar will buy, Column 2 shows how many units a euro will buy, and so forth.

Source: Adapted from “Key Currency Cross Rates,” The Wall Street Journal Online, http://online.wsj.com, May 27, 2008.

SEL

F^ TEST Explain the di# erence between direct and indirect quotations.

What is a cross rate?

Assume that today 1 Canadian dollar is worth 0.75 U.S. dollar. How many

Canadian dollars would you receive for 1 U.S. dollar? (1.333)

Assume that 1 U.S. dollar can be exchanged for 105 Japanese yen or for

0.80 euro. What is the euro/yen exchange rate? (€0.007619/¥)

17-5 TRADING IN FOREIGN EXCHANGE

Importers, exporters, tourists, and governments buy and sell currencies in the for-

eign exchange market. For example, when a U.S. trader imports automobiles from

Japan, payment is probably made in Japanese yen. The importer buys yen (through

its bank) in the foreign exchange market, much as one buys common stocks on the

New York Stock Exchange or pork bellies on the Chicago Mercantile Exchange.

However, whereas stock and commodity exchanges have organized trading " oors,

the foreign exchange market consists of a network of brokers and banks based in

New York, London, Tokyo, and other! nancial centers. Most buy and sell orders

are conducted by computer and telephone.^3

(^3) For a more detailed explanation of exchange rate determination and operations of the foreign exchange mar-
ket, see Roy L. Crum, Eugene F. Brigham, and Joel F. Houston, Fundamentals of International Finance (Mason, OH:
Thomson South-Western, 2005).