Each country in the world has its own currency. A notable exception is the eurozone, which consists of 19 European countries that have adopted the euro as their currency. When MNCs and individuals engage in international transactions, they usually need to exchange their local currency for foreign currency or exchange foreign currency for their local currency. The foreign exchange market allows the exchange of one currency for another. Large commercial banks serve this market by keeping a supply of each currency so that they can accommodate demand by individuals or multinational companies for currencies for various transactions. Individuals depend on the foreign exchange market when they travel abroad. People from the United States exchange dollars for Mexican pesos when they visit Mexico, dollars for euros when they visit Italy, or dollars for Japanese yen when they visit Japan. Some MNCs based in the United States exchange dollars for Mexican pesos when they buy supplies in Mexico denominated in pesos, or exchange dollars for euros when they buy supplies from Italy denominated in euros.

MNCs located in the United States usually charge their products and services in dollars, so if a Mexican company wants to buy products from a US company, the company must first convert the Mexican peso into dollars. Alternatively, if a US company is willing to accept the Mexican peso as payment, then the company needs to convert the peso into dollars. MNCs also need to exchange their local currency when they make foreign investments. For example, if a US-based MNC wants to invest in securities issued by the Italian government, or if it wants to buy an Italian company, it must first convert dollars to euros.

At any time, the exchange rate between two currencies determines the rate at which one currency can be exchanged for another. In essence, the exchange rate represents the price at which one currency can be purchased with another. If the Mexican peso exchange rate is $0.10, the cost of your spring break hotel in Mexico that charges 700 pesos per night will be 700 $3.10 5$70. If the exchange rate is higher (such as 1peso5$0.11), your cost in dollars will be higher. The Mexican peso exchange rate will also determine how many dollars an MNC needs to purchase a billed inventory of 1 million pesos.


  • Madura, J. (2020). International financial management. Cengage Learning.
  • Madura, J., & McCarty, D. E. (1989). Research trends and gaps in international financial management: a note. Management International Review, 75-79.

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