Exchange Rates 551
We can use the data in Table 15-1 to show how to work with exchange rates. Sup-
pose a tourist flies from New York to London, then to Paris, and then on to Geneva.
She then flies to Montreal, and finally back to New York. Her tour includes lodging,
food, and transportation, but she must pay for any other expenses. When she arrives at
London’s Heathrow Airport, she goes to the bank to check the foreign exchange list-
ings. The rate she observes for U.S. dollars is $1.4333; this means that £1 will cost
$1.4333. Assume that she exchanges $3,000:
and enjoys a week’s vacation in London, ending with £1,000.
After traveling to Dover and catching the Hovercraft to Calais on the coast of
France, she realizes that she needs to exchange her 1,000 remaining pounds for euros.
However, what she sees on the board is the direct quotation for dollars per pound and
the direct quotation for dollars per euro. The exchange rate between any two curren-
cies other than dollars is called a cross rate. Cross rates are actually calculated on the
basis of various currencies relative to the U.S. dollar. For example, the cross rate be-
tween British pounds and euros is computed as follows:
Cross rate of euros per pound 1.6115 euros per pound.
Therefore, for every British pound she would receive 1.6115 euros, so she would re-
ceive 1.6115(1,000) 1,611.5 euros.
She has 800 euros remaining when she finishes touring in France and arrives in
Geneva. She again needs to determine a cross rate, this time between euros and Swiss
francs. The quotes she sees, as shown in Table 15-1, are a direct quote for euros
($0.8894 per euro) and an indirect quote for Swiss francs (SFr 1.6592 per dollar). To
find the cross rate for Swiss francs per euro, she makes the following calculation:
Cross rate of Swiss francs per euro
(SFr 1.6592 per dollar)($0.8894 per euro)
1.4757 Swiss francs per euro.
a
Swiss francs
Dollar
ba
Dollars
euro
b
$1.4333 per pound
$0.8894 per euro
$3,000
$3,000
$1.4333 per pound
£2,093.07
TABLE 15-1 Selected Exchange Rates (December 7, 2001)
Direct Quotation: Indirect Quotation:
U.S. Dollars Required Number of Units
to Buy One Unit of of Foreign Currency
Foreign Currency per U.S. Dollar
(1) (2)
British pound $1.4333 0.6977
Canadian dollar 0.6348 1.5752
Japanese yen 0.007966 125.54
Mexican peso 0.1087 9.2015
Swiss franc 0.6027 1.6592
EMU euro 0.8894 1.1244
Note: Column 1 equals 1.0 divided by Column 2. However, rounding differences do occur.
Source:The Wall Street Journal,http://interactive.wsj.com.
Multinational Financial Management 545
