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Foreign Currency Financial Reporting from Euro to Yen to Yuan: A Guide to Fundamental Concepts and Practical Applications by Robert Rowan

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CHAPTER 1

Isn’t Currency Conversion Just Multiplication?

Each new step we take in thought reconciles twenty seemingly discordant facts, as expressions of one law.1

—Ralph Waldo Emerson, “Circles”

Whether one lives close to the border of another country, travels internationally, pays attention in school, or most unfortunately lives in a poverty-stricken country, the fact that the world uses many different currencies is common knowledge. Newspapers, magazines, web sites, and computer applications provide exchange rates and tools to convert from one currency to another. A traveler who goes abroad and exchanges currency will note that the conversion rates available in the newspaper, at the airport currency exchange booth, and at the bank in the destination city all differ. Clearly the people who run the airport booth charge a different and more expensive rate for the convenience of the service provided. That’s how they make money. They can take the money to the same bank in the city, with the difference in rates being their profit. How do these different sources get their rates, and how does one convert currencies?

CONVERSION

How to convert a sum of money from one currency to another appears to be self-evident—axiomatic. The technical skills required are learned in a grade-school mathematics curriculum. All that is needed is an exchange rate and the ability to multiply. Right?

The concept and process differ little from that of converting units from the English measurement system to ...

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