Introduction to Finance

Small Business Practice

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C H A PT E R 6 International Finance and Trade
electronically so that when an individual or fi rm engaged in a foreign transaction deals with 
a local bank, that individual or fi rm is, in eff ect, dealing with the exchange markets of the 
world. Transactions throughout the world may be completed in only a few minutes by virtue 
of the eff ective communications network serving the various fi nancial institutions, including 
central banks of every nation.
Exchange Rate Quotations
A 
currency exchange rate
indicates the value of one currency relative to another cur-
rency. 
Table 6.1
shows the currency exchange rates for a variety of foreign currencies rel-
ative to the U.S. dollar during late February, 2016. Currency exchange rates are stated in 
two basic ways. The 
direct quotation method
 
indicates the value of one unit of a foreign 
currency in terms of a home country’s currency. For illustration purposes, let’s focus on 
the U.S. dollar as the domestic or home country’s currency relative to the European euro. 
Notice in Table 6.1 that the “U.S. dollar equivalent” of one euro was $1.0933; or, stated 
diff erently, it took $1.0933 to buy one euro. The 
indirect quotation method
indicates the 
number of units of a foreign currency needed to purchase one unit of the home country’s 
currency. By, again, turning to Table 6.1, we see that it takes .9147 euros to purchase one 
U.S. dollar. 
Table 6.1 also shows the value of other major currencies in U.S. dollar terms in late 
February, 2016. An Australia dollar was worth $0.7128, a United Kingdom (British) pound 
had a value $1.3873, a Swiss franc equaled $1.0037, and a Japanese yen was worth $0.0088. 
The corresponding indirect quotations in units relative to one U.S. dollar were, as follows: 
Australia dollar = 1.4029, United Kingdom pound = 0.7208, Swiss franc = 0.9963, and 
Japanese yen = 113.9900. It should be apparent that it is easy to fi nd the other quotation if we