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Exhibit 7.4 Time line in pounds and dollars.
Let‟s do our time line again, but this time from the perspective of someone in London (Exhibit
7.4).
Rodney: Now I see what is happening. Exchange rate movement can make a big difference in the
value of an investment even in a short period of time. Sometimes the rate is stable, and sometimes it
moves a lot.
Dad: Right! You get it. By now you are beginning to see the disadvantage and perhaps the advantage
of converting currency and investing in another country. Of course, things were not always this way.
Most of the major countries operated with fixed exchange rates set by the Bretton Woods Agreement
concluded in 1944. This functioned well for over 40 years. (By the way, Bretton Woods is a resort
town in the shadow of Mount Washington in New Hampshire.) One advantage of fixed exchange rates
is that they function as one currency. You do not have to worry about exchange rates in the United
States—your dollar is the same in Maine as it is in Alaska, Texas, or even New York City.
Lesson: There can be significant risk for an investment due only to the potential change of exchange
rates. There are periods of little movement and periods of strong movements.
One Currency: European Union and Eurozone
One reason many nations in Europe adopted the euro was to eliminate the risk and complexity of
varying exchange rates. The euro avoids the need to change currency when you drive from Italy to
France to Germany. It allows an investor in Ireland to invest in Austria without worrying about
currency movements. You can see why this is an advantage, especially in small countries like Malta.
Countries with the euro as their official currency are in the eurozone.
As a matter of fact, the following nations have adopted the euro as their official currency: