Exchange Rates and International Trade
An exchange rate is the number of units of a given currency that can be purchased for one unit of another currency. It is a common practice in world currency markets to use the indirect quotation, that is, quoting all exchange rates (except for the British pound) per U.S. dollar. The Wall Street Journal foreign exchange data for December 16,1997, for example, showed the quotation for the Canadian dollar as being 1.4256 per 1 U.S. dollar (see Table 10.1). Direct quotation is the expression of the number of U.S. dollars required to buy one unit of foreign currency. The direct U.S. dollar quotation on December 16, 1997, for the Canadian dollar was U.S. $0.7017. Although it is common for foreign currency markets around the world to quote rates in U.S. dollars, some traders state the price of other currencies in terms of the dealer’s home currency (cross rates), for exam ple, Dutch guilders against Japanese yen, French francs against Spanish pesetas, and so on.