Assumptions Value
US dollar funds for expenses in Rio de Janeiro $15,000.00
Average exchange rate for the month (BRL = 1.00 USD):
January BRL 4.0553
February BRL 3.9651
March BRL 3.6984
April BRL 3.5639
May BRL 3.5416
June BRL 3.4236
July BRL 3.2785
August 8 in Airport BRL 3.1805
Answers Toys
Brazilian real proceeds from exchange by month:
US$ x spot exchange rate (BRL = 1.00 USD)
January BRL 60,829.50
February BRL 59,476.50
March BRL 55,476.00
April BRL 53,458.50
May BRL 53,124.00
June BRL 51,354.00
July BRL 49,177.50
August 8 in Airport BRL 47,707.50
Problem 1.1 Rio Games and the Brazilian Real
Ryan Lock had planned his trip to the Olympic Games in Rio de Janeiro, Brazil, for many months. He had
budgeted – saved – $15,000 for expenses while in Rio. But he had postponed exchanging the dollars for
Brazilian currency – real (BRL or R$) – until the very last minute on August 8th, doing it in the airport in
the United States at BRL 3.1805 = 1.00 USD. Given the following average monthly exchange rates in 2016,
when should he have exchanged the dollars for real to maximize his Brazilian spending money?
Looks like Ryan messed up by waiting to exchange the currency on his flight out to Rio. The airport spot
rate turned out to be the worst for Ryan as the Brazilian real had appreciated versus the US dollar over the
year. The best exchange rate was that in January of 2016. But then again, Ryan did not have a crystal ball
and did not know how the exchange rate would do over the year. Welcome to the dilemma of exchange
rates in international travel — and business.
Assumptions Value
Price of 100 Pokecoins in Mexico City (Mexican pesos, MXN or Ps) MXN 17
Spot exchange rate between the peso and the dollar (MXN = 1.00 USD) MXN 18.00
Spot exchange rate between the dollar and the yen (JPY = 1.00 USD) ¥100.00
Answers Toys
a. What are the US dollar proceeds of the sale in Mexican pesos?
Proceeds in Mexican pesos (MXN) / Spot exchange rate (MXN/$) $0.9444
b. What are the Japanes yen proceeds of the US dollar proceeds of the sale?
Proceeds in U.S. dollars x Spot exchange rate (¥/$) ¥94.44
Problem 1.2 Pokémon Go
Crystal Gomez, who lives in Mexico City (as noted in the Global Finance in Practice 1.2 in the chapter),
bought 100 Pokécoins for 17 Mexican pesos (Ps or MXN). Nintendo of Japan, one of the part owners of
Pokémon Go, will need to convert the Mexican pesos (Ps or MXN) into is home currency, the Japanese
yen, in order to record the financial proceeds. The current spot exchange rate between the Mexican peso
and the U.S. dollar is 18.00 (MXN = 1.00 USD) and the current spot rate between the dollar and the
Japanese yen (¥ or JPY) is 100.00. What are the yen proceeds of Crystal Gomez’s purchase?
Spot rate on the GTQ/€ cross rate GTQ 10.5799/€
Spot rate on the €/reais cross rate €0.4462/R$
Assumptions Values
Amount of reais from parents 4,500.00
Spot rate (R$/€) 10.5799
Spot rate (€/GTQ) 0.4462
a. What is the R$/GTQ cross rate?
Cross rate (R$/GTQ) 4.72
Reais/GTQ = R$/€ x €/GTQ
b. How many quetzals will he get for his reais?
Converting your reais into quetzals 21,243
Problem 1.2 Isaac Díez
Isaac Díez Peris lives in Rio de Janeiro. While attending school in Spain he meets
Juan Carlos Cordero from Guatemala. Over the summer holiday Isaac decides to
visit Juan Carlos in Guatemala City for a couple of weeks. Isaac’s parents give
him some spending money, R$4,500. Isaac wants to exchange it to Guatemlan
quetzals (GTQ). He collects the following rates:
a. What is the Brazilian reais/Guatemalan quetzal cross rate?
b. How many quetzals will Isaac get for his reais?
Spot rate on the dollar/euro cross rate $1.0644/€
Spot rate on the ruble/dollar cross rate Rbl 59.468/$
Assumptions Values
Beginning your trip with euros 15,000.00
Spot rate ($/€)1.0644
Spot rate (Rubles/$) 59.47
a) What is the Russian ruble/euro cross rate?
Cross rate (Rubles/€)63.30
Rubles/ € = Rubles/$ x $/ €
b) How many rubles will you obtain for your euros?
Converting your euros into Rubles 949,466
Problem 1.4 Munich to Moscow
For your post-graduation celebratory trip you decide to travel from Munich,
Germany to Moscow, Russia. You leave Munich with 15,000 euros in your wallet.
Wanting to exchange all of these for Russian rubles, you obtain the following
quotes:
a. What is the Russian ruble/euro cross rate?
b. How many rubles will you obtain for your euros?
Spot rate on the rubles/dollar cross rate Rbl 30.96/$
Spot rate on the yen/dollar cross rate ¥84.02/$
Assumptions Values
Beginning your trip with rubles 450,000.00
Spot rate (Rubles/$ or RBL = 1.00 USD) 30.96
Spot rate (¥/$ or JPY = 1.00 USD) 84.02
a) What is the Russian ruble/yen cross rate?
Cross rate (Rubles/¥)0.3685
Rubles/¥ = Rubles/$ ÷ ¥/$
b) How many yen will you obtain for your rubles?
Converting your Rubles into yen 1,221,177
a. What is the Russian ruble/yen cross rate?
b. How many yen will you obtain for your rubles?
Problem 1.5 Moscow to Tokyo
After spending a week in Moscow you get an email from your friend in Japan. He
can get you a really good deal on a plane ticket and wants you to meet him in
Tokyo next week to continue your post-graduation celebratory trip. You have
450,000 rubles left in your money pouch. In preparation for the trip you want to
exchange your Russian rubles for Japanese yen so you get the following quotes:
Assumptions Values
Buy a US dollar in Brussels for (€/$) 0.7600
Which is equivalent, the reciprocal ($/€) $1.3158
Buy a euro in NY for ($/€) $1.3200
Which is equivalent, the reciprocal (€/$) 0.7576
There is an obvious minor difference between the two currency quotes.
Assumptions Rate Values
Spot rate, December 20, 1994 (Ps/$) S1 3.30
Spot rate, December 21, 1994 (Ps/$) S2 5.50
Calculation percentage of devaluation:
Percentage change in the peso versus the dollar -40.00%
Percent change = ( S1 – S2 ) ÷ ( S2 )
The peso since that time, and we have now weathered two additional six-year dates (2000 and
2006), has been remarkable stable against all major currencies, including the dollar.
Problem 1.7 Mexico’s Cada Seis Años
Mexico was famous – or infamous – for many years in having two things every six years (cada
seis años in Spanish): a presidential election and a currency devaluation. This was the case in
1976, 1982, 1988, and in 1994. In its last devaluation on December 20, 1994, the value of the
Mexican peso (Ps) was officially changed from Ps3.30/$ to Ps5.50/$. What was the percentage
devaluation?
Country ISO Currency Salary Signing Bonus Currency = $1.00
United Kingdom GBP
pounds (£)£73,000.00 £20,000.00 0.7000
Czech Republic CZK koruna (Kc) 1,850,000.00 Kč 325,000.00 Kč 24.35
France EUR
euros (€)€ 83,000.00 € 17,000.00 0.9000
Converting Each Salary and Signing Bonus into US Dollars:
Country ISO Currency Salary Signing Bonus Currency = $1.00 Salary (US$) Bonus (US$) Total (US$)
United Kingdom GBP
pounds (£)£73,000.00 £20,000.00 0.7000 $104,286 $28,571 $132,857.14
Czech Republic CZK koruna (Kc) 1,850,000.00 Kč 325,000.00 Kč 24.35 $75,975 $13,347 $89,322.38
France EUR
euros (€)€ 83,000.00 € 17,000.00 0.9000 $92,222 $18,889 $111,111.11
The posting in the United Kingdom has the highest total value as measured in U.S. dollars.
Now if you were Kyle, you might also consider the cost of living in each location and the appropriate tax rate. And of course the career potential, your capabilities in second languages,
your cultural interests, and everything else that has to be considered when choosing where you will live — at least initially.
Problem 1.8 Kyle’s Competing Offers
Kyle, after an arduous post-graduation job search, has received an offer of the following three different country posts with a major multinational company. Each of the three countries —
the United Kingdom, the Czech Republic, and France — offer different starting salaries and different signing bonuses, but in different currencies. Kyle wants to first compare all of the
compensation packages in a common currency, the U.S. dollar. Use the following data to determine which offer represents the greatest initial U.S. dollar compensation package.
After completing the table below, answer the following questions.
a. Which city in the table truly offers the cheapest date?
b. Which city in the table offers the most expensive-cheap date?
c. If the exchange rate in Moscow on the Russian ruble (RUB) was 0.04200, instead of 0.0283, what would be the USD price?
Cheap Date in Exchange Exchange Rate Cheap Date in Relative
Country City Local Currency Rate Quote 7 April 2014 In USD to NYC
Australia Sydney AUD 111.96 USD = 1 AUD 0.9290 104.01 112%
Brazil Rio de Janeiro BRL 135.43 USD = 1 BRL 0.4363 59.09 63%
Canada Ottawa CAD 78.33 USD = 1 CAD 0.9106 71.33 77%
China Shanghai CNY 373.87 USD = 1 CNY 0.1619 60.53 65%
France Paris EUR 75.57 USD = 1 EUR 1.3702 103.55 111%
Germany Berlin EUR 76.49 USD = 1 EUR 1.3702 104.81 112%
Hong Kong Hong Kong HKD 467.03 USD = 1 HKD 0.1289 60.20 65%
India Mumbai INR 1,379.64 USD = 1 INR 0.0167 23.04 25%
Indonesia Jakarta IDR 314,700 USD = 1 IDR 0.0001 31.47 34%
Japan Tokyo JPY 10,269.07 USD = 1 JPY 0.0097 99.61 107%
Malaysia Kuala Lumpur MYR 117.85 USD = 1 MYR 0.3048 35.92 39%
Mexico Mexico City MXN 423.93 USD = 1 MXN 0.0769 32.60 35%
New Zealand Auckland NZD 111.52 USD = 1 NZD 0.8595 95.85 103%
Phillipines Manila PHP 1,182.88 USD = 1 PHP 0.0222 26.26 28%
Russia Moscow RUB 2,451.24 USD = 1 RUB 0.0283 69.37 74%
Singapore Singapore SGD 77.89 USD = 1 SGD 0.7939 61.84 66%
South Africa Cape Town ZAR 388.58 USD = 1 ZAR 0.0946 36.76 39%
United Kingdom London GBP 73.29 USD = 1 GBP 1.6566 121.41 130%
United States New York City USD 93.20 1 USD 1.0000 93.20 100%
United States San Francisco USD 88.72 1 USD 1.0000 88.72 95%
a. The truly cheapest cheap date could be had in Mumbai, India, at only 25% of what it costs in New York City.
b. The most expensive-cheap date would be London at 130% of the cost of New York City.
c. If the Russian ruble was actually trading at 0.042 instead of 0.0283, Moscow would be 110% of the cost of a cheap date in New York City.
d. If the exchange rate in Shangahi was CNY 6.66 = 1 USD, a cheap date would cost USD 56.14, only 60% of the cost in New York City.
Problem 1.9 Comparing Cheap Dates Around the World
Comparison of prices or costs across different country and currency environments requires the translation of the local currency into a
single common currency. This is most meaningful when the comparison is for the identical or near-identical product or service across
countries. Deutsche Bank has recently started publishing a comparison of cheap dates — and evening on the town for two to eat at
McDonald’s, see a movie, and drink a beer. Once all costs are converted to a common currency, the U.S. dollar in this case, the cost of the
date can be compared across cities relative to the base case of a cheap date in USD in New York City.
Source: Data drawn from The Random Walk, Mapping the World’s Prices 2014 , Deutsche Bank Research, 09 May 2014, Figures 30 and 32, with
author calculations. ‘Relative to NYC’ is calculated as = Cheap Date in USD/93.20.
Note: The cheap date combines the local currency cost of a cab ride for two, two McDonald’s hamburgers, two soft drinks, two movie tickets, and two
beers. In 2013 Deutsche Bank had included sending a bouquet of roses in the date, but did not include that in the 2014 index, making the two years not
directly comparable.
d. If the exchange rate in Shangahi was CNY 6.66 = 1 USD, what would be its cost in USD and relative to a cheap date in New York
City?
Japanese Britih European Chinese Russian
United States
Net Income Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary
2013 JPY 1,500 GBP 100.00 EUR 204.00 CNY 168.00 RUB 124.00 USD 360.00
2014 JPY 1,460 GBP 106.40 EUR 208.00 CNY 194.00 RUB 116.00 USD 382.00
The average exchange rate for each year, by currency pairs, was the following. Use this data to answer the following questions.
Exchange Rate JPY = 1 USD USD = 1 GBP USD = 1 EUR CNY = 1 USD RUB = 1 USD USD
2013 97.57 1.5646 1.3286 6.1484 31.86 1.0000
2014 105.88 1.6473 1.3288 6.1612 38.62 1.0000
a. What was Blundell Biotech’s consolidated profits in U.S. dollars in 2013 and 2014?
Japanese Britih European Chinese Russian
United States
Consolidated
Net Income (USD) Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Earnings
2013 USD 15.37 USD 156.46 USD 271.03 USD 27.32 USD 3.89 USD 360.00 USD 834.08
2014 USD 13.79 USD 175.27 USD 276.39 USD 31.49 USD 3.00 USD 382.00 USD 881.94
5.74%
b. If the exchange rates for 2013 are used for both years, earnings from individual subsidiaries and consolidation appear as follows.
Japanese Britih European Chinese Russian
United States
Consolidated
Net Income (USD) Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Earnings
2013 USD 15.37 USD 156.46 USD 271.03 USD 27.32 USD 3.89 USD 360.00 USD 834.08
2014 USD 14.96 USD 166.47 USD 276.35 USD 31.55 USD 3.64 USD 382.00 USD 874.98
Change (USD 0.41) USD 10.01 USD 5.31 USD 4.23 (USD 0.25) USD 22.00 USD 40.90
Percent change -2.7% 6.4% 2.0% 15.5% -6.5% 6.1% 4.90%
Total percent change = (1 + Actual percent change) x (1 + Foreign exchange percent change) -1
When rearranged to solve for the FX percent change:
FX percent change = (1.0574)/(1.0490) – 1 = 0.80%
On a constant currency basis, all subsidiaries showed growth in profits except for the Japanese and Russian subsidiaries. Fortunately for
Blundell, neither of those subsidiaries is a major contributor to total profits.
c. Using the results of the constant currency analysis in part b, is it possible to separate Blundell’s growth in earnings between
local currency earnings and foreign exchange rate impacts on a consolidated basis?
c. Blundell Biotech’s consolidated earnings grew 5.7%. Since 4.9% of that was on an actual results basis (using constant currency assumption),
the exchange rate-based change in earnings can be solved for:
Blundell Biotech is a U.S.-based biotechnology company with operations and earnings in a number of foreign countries. The
company‘s profits by subsidiary, in local currency (in millions), are shown in the following table for 2013 and 2014.
Problem 1.10 Blundell Biotech
a. Consolidated profits or earnings is found by consolidating the converted profits in each foreign currency to U.S. dollars for that period. (This
is simplified. Actual accounting practices would require the additional netting of any intra-company transactions resulting to eliminate any
double-counting of profits.)
b. If the same exchange rates were used for both years – what is often called a “constant currency basis” – was the change in
corporate earnings on a constant currency basis?
b. What has been the impact on Peng’s margins from this pricing strategy?
Fixed Rmb Pricing of the PT350 Plasma Cutting Torch
Cost Margin Price Margin Average Rate Price Percent Chg
Year (Rmb) (Rmb) (Rmb) (percent) (Rmb/US$) (US$) in US$ Price
2007 16,000 2,000 18,000 11.1% 7.61 2,365 —
2008 15,400 2,600 18,000 14.4% 6.95 2,590 9.50%
2009 14,800 3,200 18,000 17.8% 6.83 2,635 1.76%
2010 14,700 3,300 18,000 18.3% 6.77 2,659 0.89%
2011 14,200 3,800 18,000 21.1% 6.46 2,786 4.80%
2012 14,400 3,600 18,000 20.0% 6.31 2,853 2.38%
2013 14,600 3,400 18,000 18.9% 6.15 2,927 2.60%
2014 14,800 3,200 18,000 17.8% 6.16 2,922 -0.16%
Cumulative 23.54%
Fixed Rmb Pricing of the PT350 Plasma Cutting Torch
Cost Margin Price Margin Average Rate Price Percent Chg
Year (Rmb) (Rmb) (Rmb) (percent) (Rmb/US$) (US$) in US$ Price
2007 16,000 2,000 18,000 11.1% 7.61 2,365 —
2008 15,400 6.95
2009 14,800 6.83
2010 14,700 6.77
2011 14,200 6.46
2012 14,400 6.31
2013 14,600 6.15
2014 14,800 6.16
Cumulative
Problem 1.11 Peng Plasma Pricing
Peng Plasma is a privately held Chinese business. It specializes in the manufacture of plasma cutting torches. Over the past
eight years it has held the Chinese renminbi price of the PT350 cutting torch fixed at Rmb 18,000 per unit. Over that same
period it has worked to reduce costs per unit, but has struggled of late due to higher input costs. Over that same period the
renminbi has continued to be revalued against the U.S. dollar by the Chinese government. After completing the table –
assuming the same price in renminbi for all years – answer the following questions.
a. What has been the impact of Peng’s pricing strategy on the US$ price? How would you expect their U.S. dollar-based
customers to have reacted to this?