Assumptions Values
Buy a US dollar in Bologna for (€/$) 0.9000
Which is equivalent, the reciprocal ($/€) $1.1111
Buy a euro in Chicago for ($/€) $1.1000
Which is equivalent, the reciprocal (€/$) 0.9091
There is an obvious minor difference between the two currency quotes.
Problem 2.1 Alexis Salas in Bologna
Alexis Salas lives in Bologna. She can buy a U.S. dollar for €0.9000. Nick
Freeman, living in Chicago, can buy a euro for $1.1000. What is the foreign
exchange rate between the dollar and the euro?
Assumptions Values
Spot rate on Mexican peso (pesos/US$) 12.4200
Amazing Inc. buys this amount of pesos 500,000.00
What is the cost in US$? 40,257.65$
(the peso amount divided by the spot exchange rate)
Spot transactions are settled in two business days, so in this case, Wednesday.
Problem 2.2 Quartzite Inc
The spot rate for Mexican pesos is Ps12.42/$. If U.S.-based company Quartzite
Inc. buys Ps500,000 spot from its bank on Monday, how much must Quartzite pay
and on what date?
Assumptions Values
Price of an ounce of gold in US dollars ($/oz) $20.67
Price of an ounce of gold in French francs (FF/oz) 410.00
What is the implied French franc/US dollar exchange rate? 19.84
(French franc price of an ounce / US dollar price of an ounce)
…. Or if expressed as $/FF 0.0504$
Problem 2.3 Gilded Question
Before World War I, $20.67 was needed to buy one ounce of gold. If, at the same time
one ounce of gold could be purchased in France for FF410.00, what was the exchange
rate between French francs and U.S. dollars?
Gold Standard
Assumptions Values What If
Price of an ounce of gold in US dollars ($/oz) $20.67 $42.00
Price of an ounce of gold in British pounds (₤/oz) £3.7683 £3.7683
What is the implied $/₤ exchange rate? $5.4852 $11.1456
(dollar price of an ounce / pound price of an ounce)
Problem 2.4 Golden Rule
Under the gold standard, the price of an ounce of gold in U.S. dollars was $20.67, while the price
of that same ounce in British pounds was £3.7683. What would the exchange rate between the
dollar and the pound be if the U.S. dollar price had been $42.00 per ounce?
Assumptions Values
Original spot rate, Japanese yen/British pound 197.00
New spot rate, Japanese yen/British pound 190.00
Export price of Toyota Tunda truck, Japanese yen 1,650,000
Original Import Price in British pounds 8,375.63
Export price in yen / Original spot rate in yen/pound
New Import Price in British pounds 8,684.21
Export price in yen / New spot rate in yen/pound
Percentage change in the price of the imported truck 3.68%
New price / Old price – 1
Problem 2.5 Toyota Exports to the United Kingdom
Because the price of the truck itself did not change, the percentage change in the
import price as expressed in British pounds is the same percentage change in the
value of the Japanese yen against the British pound itself.
Toyota manufactures in Japan most of the vehicles it sells in the United Kingdom.
The base platform for the Toyota Tundra truck line is ¥1,650,000. The spot rate of
the Japanese yen against the British pound has recently moved from ¥197/£ to
¥190/£. How does this change the price of the Tundra to Toyota’s British subsidiary
in British pounds?
Assumptions Values
Canadian dollar list price of book (C$) 26.33
US dollar list price of book ($) 23.10
Implied exchange rate (C$/$) 1.1398
Problem 2.6 Loonie Parity
If the price of former Chairman of the U.S. Federal Reserve Alan Greenspan’s
memoir, “The Age of Turbulence,” is listed on Amazon.ca as C$26.33, but costs just
US$23.10 on Amazon.com, what exchange rate does that imply between the two
currencies?
This simple book price is representative of what so many Canadians were unhappy
about after the Canadian dollar — the Loonie — gained parity with the dollar in 2007.
Although the Canadian dollar was quoted in the currency markets at equal value with
the US dollar (1 C$ = 1 $), the prices of many of the same goods and services in the
marketplace still implied a much weaker Canadian dollar.
Calculation of Percentage Change in Value Values
Initial exchange rate (peso/$) 3.20
New exchange rate (peso/$) 5.50
Percentage change in peso value -41.82%
(beginning rate – ending rate) / (ending rate)
Problem 2.7 Mexican Peso Changes
Anytime a government sets or resets the value of its currency, it is a
managed or fixed exchange rate. If that is the case, any change in its official
value must be either a “revaluation” or “devaluation.” In this case, a
devaluation. This is evident from the fact that it now takes more pesos per
U.S. dollar, so its value is less or devalued. In terms of the percentage
change calculation, this is indicated by the negative percentage change.
In December 1994, the government of Mexico officially changed the value
of the Mexican peso from 3.2 pesos per dollar to 5.5 pesos per dollar. What
was the percentage change in its value? Was this a depreciation,
devaluation, appreciation, or revaluation? Explain.
Assumptions Values
Original Chinese yuan peg to the dollar, yuan/$ 8.28
Revalued Chinese yuan to the dollar, yuan/$ 8.11
Hong Kong dollar peg to the US dollar, HK$/$ 7.80
Original HK$/Yuan cross rate 0.9420
HK$/Yuan = (HK$/$) x ($/Yuan)
New HK$/Yuan cross rate 0.9618
HK$/Yuan = (HK$/$) x ($/Yuan)
Problem 2.8 Hong Kong Dollar and the Chinese Yuan
As a result of the revaluation of the Chinese yuan, the Hong Kong dollar has fallen
in value against the Chinese yuan.
The Hong Kong dollar has long been pegged to the U.S. dollar at HK$7.80/$. When
the Chinese yuan was revalued in July 2005 against the U.S. dollar from Yuan8.28/$
to Yuan8.11/$, how did the value of the Hong Kong dollar change against the yuan?
Calculation of Percentage Change in Value Values
Initial exchange rate, post official revaluation (Yuan/$) 8.11
Percentage revaluation against the US dollar 20.00%
Revalued exchange rate (Yuan/$) 6.76
Initial exchange rate, post official revaluation (Yuan/$) 8.11
Percentage revaluation against the US dollar 30.00%
Revalued exchange rate (Yuan/$) 6.24
Problem 2.9 Chinese Yuan Revaluation
As painfully obvious, it is clear why so many critics of the Chinese yuan
policy were not particularly happy with the revaluation of only 2.1%.
Many experts believe that the Chinese currency should not only be revalued
against the U.S. dollar as it was in July 2005, but also be revalued by 20%
or 30%. What would be the new exchange rate value if the yuan was
revalued an additional 20% or 30% from its initial post-revaluation rate of
Yuan 8.11/$?
Assumptions Values
Original (2009) cholesterol unit price, rupees (Rps) 21,900.00
Original (2009) Brazilian reais price for sale and distribution 895.00
Average spot rate for 2010, rupees per reais 26.15
Implied original spot rate, Indian rupees per Brazilian reais 24.47
Recalcualted Indian rupee price of product 23,404.25
(Original reais price x Avg spot rate for 2010)
Problem 2.10 Ranbaxy (India) in Brazil
First, the implied spot exchange rate for the previous year, 2009 must be found by
dividing the Indian rupee price by the Brazilian reais price selected for distribution and
sale.
Assuming that Ranbaxy wishes to preserve the Brazilian reais price for competitiveness,
the same Brazilian reais price must be converted back into Indian rupees with the new
spot exchange rate in rupees per reais:
Because the Indian rupee depreciated in value against the Brazilian reais, the implied
Indian rupee price is actually HIGHER than it was the previous year. This means that
Ranbaxy would keep the same Brazilian reais price and either enjoy a much larger profit
margin in Indian rupees, or potentially keep the Indian rupee price the same as the
previous year and actually reduce the Brazilian reais price.
Ranbaxy, an India-based pharmaceutical firm, has continuing problems with its
cholesterol reduction product’s price in one of its rapidly growing markets, Brazil. All
product is produced in India, with costs and pricing initially stated in Indian rupees (Rps),
but converted to Brazilian reais (R$) for distribution and sale in Brazil. In 2009, the unit
volume was priced at Rps21,900, with a Brazilian reais price set at R$895. But in 2010,
the reais appreciated in value versus the rupee, averaging Rps26.15/R$. In order to
preserve the reais price and product profit margin in rupees, what should the new rupee
price be set at?
Currency Exchange Rate Commission
Vietnamese bank rate d19,800 2.50%
Saigon Airport exchange bureau rate d19,500 2.00%
Hotel exchange bureau rate d19,400 1.50%
Assuming an intial cash amount for exchange to dong of: $10,000.00
Vietnamese
Assumptions Values dong proceeds
Vietnamese bank rate (dong/$) 19,800
Bank commission (%) 2.50% 193,050,000
Saigon Airport Exchange Bureau rate (dong/$) 19,500
Airport comission (%) 2.00% 191,100,000
Hotel Exchange Bureau rate (dong/$) 19,425
Hotel comission (%) 1.50% 191,336,250
The combined exchange rate and commission offered in the commercial banks in Vietnam is the better rate. In the case
of the Hotel Exchange Bureau rate, although its exchange rate is slightly weaker than the airport, its lower comission
makes it preferable over the combined airport rate.
Many people were surprised when Vietnam became the second largest coffee producing country in the world in recent
years, second only to Brazil. The Vietnamese dong, VND or d, is managed against the U.S. dollar but is not widely
traded. If you were a traveling coffee buyer for the wholeale market (a “coyote” by industry terminology), which of the
following currency rates and exchange commission fees would be in your best interest if traveling to Vietnam on a
buying trip?
Problem 2.11 Vietnamese Coffee Coyote
Round trip RailEurope train fare $170.00
British pound Euro British pound Continental
Spot Rate Spot Rate train fare train fare
Date of Spot Rate (£/$) (€/$) (£) (€)
Monday 0.5702 0.8304 £96.93 € 141.17
Tuesday 0.5712 0.8293 £97.10 € 140.98
Wednesday 0.5756 0.8340 £97.85 € 141.78
Problem 2.12 Chunnel Choices
In an attempt to be neutral or impartial in its currency of pricing, the Chunnel has actually introduced a degree of
currency risk to all customers either British or Continental, as neither group counts the U.S. dollar as its home or
domestic currency. The day-to-day fluctuations in the dollar against the pound and the euro may seem relatively small
over a three day period, but over several weeks or months in recent years, the changes could have been significant in the
eyes of potential customers.
The Channel Tunnel or “Chunnel” passes underneath the English Channel between Great Britain and France, a land-
link between the Continent and the British Isles. One side is therefore an economy of British pounds, the other euros. If
you were to check the Chunnel’s rail ticket Internet rates you would find that they would be denominated in U.S. dollars
(USD). For example, a first class round trip fare for a single adult from London to Paris via the Chunnel through
RailEurope may cost USD170.00. This currency neutrality, however, means that customers on both ends of the Chunnel
pay differing rates in their home currencies from day to day. What is the British pound and euro denominated prices for
the USD170.00 round trip fare in local currency if purchased on the following dates at the accompanying spot rates
drawn from the Financial Times?
Currency Crossrate Spot Rate
Jordanian dinar (JD) per euro (€) JD 0.96/€
Jordanian dinar (JD) per U.S. dollar ($) JD 0.711/$
Saudi Arabian riyal (SRI) per U.S. dollar ($) SRI 3.751/$
Assumptions Values
Purchase price, in euros (€)€ 425,000
Spot rate of exchange, Jordanian dinar per euro (JD/€)0.9600
Spot rate of exchange, Jordanian dinar per dollar (JD/$) 0.7110
Spot rate, Saudi Arabian riyal per Jordanian dinar (SRI/JD) 5.2751
Jordanian import duty on EU products 13.00%
Jordanian resale fees 28.00%
Spot rate of exchange, Saudi Arabian riyal (SRI/$) 3.751
What is the dollar price after all exchanges and fees?
Purchase price, converted to Jordanian dinar (JD) 408,000.00
Additional fees due on importation 53,040.00
Total cost, Jordanian dinar (JD) 461,040.00
Resale fee in Jordan 129,091.20
Resale price to Saudi Arabian, in JD 590,131.20
Price paid in Iraqi dinar, converting JD to SRI 3,113,004.33
(spot rate (SRI/JD) x Resale price to Saudi Arabian (JD) )
U.S. dollar equivalent of final price paid 830,001.69$
Problem 2.13 Barcelona Exports
Oriol Díez Miguel S.R.L., a manufacturer of heavy duty machine tools near Barcelona, ships an
order to a buyer in Jordan. The purchase price is €425,000. Jordan imposes a 13% import duty on
all products purchased from the European Union. The Jordanian importer then re-exports the
product to a Saudi Arabian importer, but only after imposing their own resale fee of 28%. Given
the following spot exchange rates on April 11, 2010, what is the total cost to the Saudi Arabian
importer in Saudi Arabian riyal, and what is the U.S. dollar equivalent of that price?
a. What is the value of the total bond as originally issued in French francs, German marks, British pounds, Dutch florins, and U.S. dollars?
b. Create a chart which shows the fixed rate of exchange implied by the coupon for the six different currencies.
Annual Quarterly
Annual Coupon Coupon
Currency Par Value Coupon Rate (4% of Par) (coupon/4) As described on the coupon
Russian gold roubles 125.00 4.000% 5.0000 1.2500 In St. Petersburg 1.25 Roubles.
French francs 500.00 4.000% 20.0000 5.0000 In Paris 5 Francs.
British pounds sterling 19.775 4.000% 0.7910 0.1978 In London 3 Schill. 11 and 1/2 P.
German marks 404.00 4.000% 16.1600 4.0400 In Berlin 4 Mark 4 Pf.
Dutch florins 239.00 4.000% 9.5600 2.3900 In Amsterdam 2 Flor. 39 C.
US gold dollars 96.25 4.000% 3.8500 0.9625 In New York 96 1/4 Cents.
Of all the currencies, the British pound sterling is the most difficult for calculation. At this time 12 pence = 1 schilling, 20 schiling = 1 pound sterling.
Russian French Pounds German Dutch US gold
roubles francs sterling marks florins dollars
Currency units (per rouble) (per franc) (per pound) (per mark) (per florin) (per dollar)
Russian gold roubles ———– 0.2500 6.3211 0.3094 0.5230 1.2987
French francs 4.0000 ———– 25.2845 1.2376 2.0921 5.1948
British pounds sterling 0.1582 0.0396 ———– 0.0489 0.0827 0.2055
German marks 3.2320 0.8080 20.4298 ———– 1.6904 4.1974
Dutch florins 1.9120 0.4780 12.0860 0.5916 ———– 2.4831
US gold dollars 0.7700 0.1925 4.8673 0.2382 0.4027 ———–
These exchange rates can then be used to calculate the total issuance value in each of the respective currencies.
Total Bond
Currency Issuance
Total issue value per rouble By Currency
Russian gold roubles ———– 113,600,000
French francs 4.0000 454,400,000
British pounds sterling 0.1582 17,971,520
German marks 3.2320 367,155,200
Dutch florins 1.9120 217,203,200
US gold dollars 0.7700 87,472,000
This is a student project, in principle, but one that is difficult to fulfill given that the French franc, German mark, and Dutch florin have all been replaced
with one common currency, the euro.
Problem 2.14 Tsar Alexander III’s Russian Gold Loan
c. Create a second chart which compares these exchange rates with these same exchange rates today (use either the Wall Street Journal or Financial Times
to find current exchange rates).
a. The value of the bond is its Par Value, as stated on the bond, assuming that the rates of interest by currency were current at the time of its
issuance. From that we can also calculate the value of each coupon (interest) payment by currency on both an annual and quarterly basis.
b. The chart or matrix of implied exchange rates is found by dividing the par values by currency. For example, French francs/Russian roubles is
found by dividing Rbl 125 by FF 500, giving an implied exchange rate of Rbl 0.2500/FF.
These total issuance values are found by multiplying the exchange rate
(Currency per rouble) by the bond’s issuance value in Russian gold roubles
(113,600,000).
c. Create a second chart which compares these exchange rates with these same exchange rates today (use either the Wall Street Journal or
Financial Times to find current exchange rates).