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On 1st January, 1999, at the start of stage three of European Economic and Monetary Union (EMU), the currencies of eleven European Union member states merged into the euro, forming a common and independent currency where previously those eleven currencies had been linked by the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). On that date, the euro superseded the European Currency Unit (ECU), which was defined in principle as a basket currency, in the ratio of 1:1, as provided in the EC Treaty, although in practice some adjustments had to be made as the components of the ECU were not identical to those of the euro. At the same time, the EMS ceased to exist. However in order to foster the convergence process in the member states that are not yet participating in the single monetary policy, and to strengthen and underpin the single market, some member states which are not introducing the euro from the outset, Denmark and Greece, are being given an opportunity to prepare themselves for full integration into the euro area by linking their currencies to the euro in the context of a new, modified exchange rate mechanism. This case provides an overview of the structural and operational features of the new exchange rate mechanism, known as ''ERM II'' for short. This case is suitable for undergraduate and postgraduate courses with an international finance, international banking or international business component. The themes covered also provide an analytical framework in which multi-national company decision making has to be analysed whether from the point of view of international finance, international marketing or international corporate strategy. It is particularly suitable for business situations where foreign exchange hedging and arbitrage decisions are being discussed.