Introduction to Finance

Table 6.2
shows the “crossrates” among several major currencies—the U.S. dollar, 
the British pound, the yen, and the euro. It is possible to calculate the exchange rate 
between the yen and the euro by first knowing each of their values relative to the U.S. 
dollar. For example, a yen was worth $.0088 and a euro $1.0933 in late February 2016. 
Dividing .0088 by 1.0933 gives a value of one yen, in euros, as 0.0080 euros. Since 
Table 6.2 shows the crossrates between the yen and the euro, we can read the value of 
one yen in terms of euros as 0.0080 euros. Of course, if we wanted to know the value of 
a Brazilian real in euros, we would have to return to Table 6.1 and make the calculation 
directly. In late February 2016, the U.S. dollar value of a Brazilian real was $.2505 and 
the value of a euro was $1.0933. Dividing .2505 by 1.0933 indicates that one real was 
worth .2291 euros.
It is worth noting that electronic and newspaper exchange rate quotes are for large unit 
transfers within the currency exchange markets. Consequently, individuals buying foreign cur-
rencies would not get exactly the same ratio. The currency exchange prices for an individual 
always favor the seller, who makes a margin of profi t.
The balance in the foreign account of a U.S. bank is subject to constant drain as the bank 
sells foreign currency claims to individuals who import goods or obtain services from other 
countries. These banks may reestablish a given deposit level in their correspondent banks 
either through selling dollar claims in the foreign countries concerned or by buying claims 
from another dealer in the foreign exchange.
Currency Exchange Rate Appreciation and Depreciation
Each currency exchange rate shown in Table 6.1 is said to be a 
spot exchange rate
, or the 
current rate being quoted for delivery of the currency “on the spot.” Actually, it is common 
practice to have up to two days for delivery after the trade date. Spot rates at diff erent points 
in time can be compared.