550 CHAPTER 15 Multinational Financial Management
The Euro: What You Need to Know
In January 1999, many Europeans began making purchases
using a new currency, the euro. This is one result of the
Maastricht Treaty, signed in 1992, as part of a decades-long
effort to form a tighter economic and monetary union
(EMU) in Europe. Eleven countries originally adopted the
euro: Belgium, Austria, Finland, France, Luxembourg, Italy,
the Netherlands, Germany, Spain, Ireland, and Portugal.
(Tip: You can remember them by the phrase BAFFLING
SIP). Britain, Switzerland, and the Scandinavian countries
chose not to join the union because they did not want to give
up control of their currencies. In addition, Greece has now
adopted the euro.
Euro bills and coins began circulating January 1, 2002.
Before then, all cash transactions were made with the coun-
try’s national currency, but paperless transactions, such as
those with a credit card, could be made in either euros or the
national currency. For example, you could pay for a bottle of
French champagne using either francs or euros (with your
credit card). After euro bills and coins began circulating,
there was a six-month phase-in period, and then all transac-
tions must be made in euros. (You will still have 10 more
years to convert remaining bills or coins at a bank at a fixed
exchange rate.)
The value of the euro will fluctuate relative to other cur-
rencies, such as the U.S. dollar. Finally, instead of each coun-
try having a central bank to manage its currency, the European
Central Bank, located in Frankfurt, Germany, will set interest
rates and manage monetary policy for the entire region.
Source: From Helene Cooper, “Europe Unites: The Launch of the Euro;
The Euro: What You Need to Know,” The Wall Street Journal,January 4,
1999, A5. Copyright © 1999 by Dow Jones & Co., Inc. Reprinted by permis-
sion of Dow Jones & Co., Inc. via Copyright Clearance Center.
Identify and briefly discuss six major factors that complicate financial manage-
ment in multinational firms.
Exchange Rates
An exchange ratespecifies the number of units of a given currency that can be pur-
chased with one unit of another currency. Exchange rates appear daily in the financial
sections of newspapers, such as The Wall Street Journal, and at financial web sites, such
as http://www.bloomberg.com. The values shown in Column 1 of Table 15-1 are the
number of U.S. dollars required to purchase one unit of foreign currency; this is called
a direct quotation. Direct quotations have a dollar sign in their quotation and state
the number of dollars per foreign currency, such as dollars per euro. Thus, the direct
U.S. dollar quotation for the euro is $0.8894, because one euro could be bought for
88.94 cents.
The exchange rates given in Column 2 represent the number of units of foreign
currency that can be purchased for one U.S. dollar; these are called indirect quota-
tions. Indirect quotations often begin with the foreign currency’s equivalent to the
dollar sign and express the foreign currency per dollar, such as euros per dollar. Thus,
the indirect quotation for the euro is €1.1244. (The “€” stands for euro, and it is anal-
ogous to the symbol “$.”)
Normal practice in currency trading centers is to use the indirect quotations (Col-
umn 2) for all currencies other than British pounds and euros, for which the direct
quotations are given. Thus we speak of the pound as “selling at 1.4333 dollars, or at
$1.4333,” and the euro as “selling at $0.8894.” For all other currencies, say, the Japa-
nese yen, we would quote the dollars as “being at ¥125.54”, where the “¥” stands for
yenand is analogous to the symbol “$.” This convention eliminates confusion when
comparing quotations from one trading center—say, New York—with those from
another—say, London or Zurich.
The Bloomberg World Cur-
rency Values site provides
up-to-the-minute foreign
currency values versus the
U.S. dollar, as well as a
cross-currency table similar
to that found in The Wall
Street Journalfor the
world’s major currencies.
The site can be accessed at
http://www.bloomberg.
com/markets/fxc.html.
544 Multinational Financial Management
