Problem 3.1 Brussels and New York

Assumptions Values

Buy a US dollar in Brussels for (€/$) 0.8200 Which is equivalent, the reciprocal ($/€) $1.2195

Buy a euro in NY for ($/€) $1.2200 Which is equivalent, the reciprocal (€/$) € 0.8197

There is an obvious minor difference between the two currency quotes.

In Brussels, one can buy a U.S. dollar for €0.8200. In New York, one can buy a euro for $1.22. What is the foreign exchange rate between the dollar and the euro?

Problem 3.2 Mexican Peso Changes

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)

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.

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.

Problem 3.3 Gold Standard

Assumptions ValuesPrice of an ounce of gold in US dollars ($/oz) $20.67Price of an ounce of gold in French francs (FF/oz) 310.00

What is the implied French franc/US dollar exchange rate? 15.00 (French franc price of an ounce / US dollar price of an ounce)

…. Or if expressed as $/FF $ 0.0667

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 FF310.00, what was the exchange rate between French francs and U.S. dollars?

Problem 3.4 Good as Gold

Gold StandardAssumptions Values What IfPrice of an ounce of gold in US dollars ($/oz) $20.67 $38.00Price of an ounce of gold in British pounds (₤/oz) £4.2474 £4.2474

What is the implied $/₤ exchange rate? $4.8665 $8.9466 (dollar price of an ounce / pound price of an ounce)

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 of gold in British pounds was £4.2474. What would the exchange rate between the dollar and the pound be if the U.S. dollar price had been $38.00 per ounce?

Problem 3.5 Mexican Peso Spot Rate

Assumptions ValuesSpot rate on Mexican peso (pesos/US$) 10.7400 Your company buys this amount of pesos 350,000.00

What is the cost in US$? $ 32,588.45 (the peso amount divided by the spot exchange rate)

Spot transactions are settled in two business days, so in this case, Wednesday.

The spot rate for Mexican pesos is Ps10.74/$. If your company buys Ps350,000 spot from your bank on Monday, how much must your company pay and on what date?

Problem 3.6 Hong Kong Dollar and the Chinese Yuan

Assumptions ValuesOriginal 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)

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?

As a result of the revaluation of the Chinese yuan, the Hong Kong dollar has fallen in value against the Chinese yuan.

Problem 3.7 Loonie Parity

Assumptions ValuesCanadian dollar list price of book (C$) 26.45 US dollar list price of book ($) 20.99

Implied exchange rate (C$/$) 1.2601

If the price of former Chairman of the U.S. Federal Reserve Alan Greenspan’s memoir, "The Age of Turbulence," is listed on the dust-jacket as C$26.45, but costs just US$20.99, 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.

Problem 3.8 Porsche Pricing (A)

Assumptions Values

€ 120,000.00Expected margin on the Panamera on European sales 20.0%

1.4400

$172,800

Price in US market $158,000 1.4240

€ 110,955.06

Price € 120,000.00Cost (.8 x price) -€ 96,000.00

Margin (.2 x price) € 24,000.00

Now, if the effective price earned on US sales was: € 110,955.06and the cost was as calculated above -€ 96,000.00

Margin would then be € 14,955.06or in percentage 12.46%

This would be a substantially smaller margin than that earned in Europe.

Porsche plans on introducing a new four-door luxury automobile in 2009 called the Panamera. Although pricing is not yet set, some automotive analysts believe the basic production model will be sold in Europe at a price of €120,000. At this price they believed the company stood to earn a 20% margin on each car.

Porsche Panamera price in Europe in 2009 (€)

Spot exchange rate in 2009 ($/€)

a. If the spot rate in 2009 was $1.4400/€, what would be its projected price in the United States?

Price in euros in Europe x spot rate ($/€)

b. If the price in the US market was set at $158,000, and the spot exchange rate averaged $1.4240/€, what would the margin on the Panamera be?

spot exchange rate ($/€)Effective price in euros (P$ ÷ $/€)

If Porsche was going to earn a 20% margin on Panamera sales in Europe, the cost of the Panamera had to be 80% of of price.

Problem 3.9 Porsche Pricing (B)

Assumptions Values

€ 120,000.00Expected margin on the Panamera on European sales 20.0%

1.6250

Price in US market $158,000 1.6250

€ 97,230.77

Price € 120,000.00Cost (.8 x price) -€ 96,000.00

Margin (.2 x price) € 24,000.00

Now, if the effective price earned on US sales was: € 97,230.77and the cost was as calculated above -€ 96,000.00

Margin would then be € 1,230.77or in percentage 1.03%

Not a good margin, to say the least.

Using the same basic data as in the previous problem, consider the following. If the dollar continues to fall throughout the year, and the spot rate in 2009 averages $1.6250/€, but the U.S. dollar price is held constant since its introduction in January 2009 at $158,000, what would be the profit margin on each car sold in the U.S.?

Porsche Panamera price in Europe in 2009 (€)

Average Spot exchange rate in 2009 ($/€)

If the price in the US market was set at $158,000, and the spot exchange rate averaged $1.6250/€, what would the margin on the Panamera be?

spot exchange rate ($/€)Effective price in euros (P$ ÷ $/€)

If Porsche was going to earn a 20% margin on Panamera sales in Europe, the cost of the Panamera had to be 80% of of price.

Problem 3.10 Toyota Exports to the United Kingdom

Assumptions ValuesOriginal 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 / Old price

Toyota manufactures most of the vehicles it sells in the United Kingdom in Japan. 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?

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.

Problem 3.11 Ranbaxy (India) in Brazil

Assumptions ValuesOriginal (2004) cholesterol unit price, rupees (Rps) 12,500.00 Original (2004) Brazilian reais price for sale and distribution 825.00 Average spot rate for 2005, rupees per reais 17.50

Implied original spot rate, Indian rupees per Brazilian reais 15.15

Recalcualted Indian rupee price of product 14,437.50 (Original reais price x Avg spot rate for 2005)

Ranbaxy, an India-based pharmaceutical firm, has continuing problems with its cholesterol reduction product's price in Brazil, one of its rapidly growing markets. 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 2004 the unit volume was priced at Rps12,500, with a Brazilian reais price set at R$825. But in 2005 the reais appreciated in value veruss the rupee, averaging Rps17.5/R$. In order to preserve the reais price and product profit margin in rupees, what should the new rupee price be set at?

First, the implied spot exchange rate for the previous year, 2004 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.

Problem 3.12 Chunnel Choices

Round trip RailEurope train fare $170.00

British pound Euro British pound ContinentalSpot Rate Spot Rate train fare train fare

Date of Spot Rate (£/$) (€/$) (£) (€)Monday 0.5702 0.8304 £96.93 € 141.17Tuesday 0.5712 0.8293 £97.10 € 140.98Wednesday 0.5756 0.8340 £97.85 € 141.78

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 ricket 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?

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.

Problem 3.13 Middle East Exports

Assumptions Values€ 375,000

0.8700 Spot rate of exchange, Jordanian dinar per dollar (JD/$) 0.7080 Spot rate, Saudi Arabian riyal per Jordanian dinar (SRI/JD) 5.2966 Spot rate of exchange, Saudi Arabian riyal (SRI/$) 3.750 Jordanian import duty on EU products 12.00%Jordanian resale fees 22.00%

What is the dollar price after all exchanges and fees?Purchase price, converted to Jordanian dinar (JD) 326,250.00 Additional fees due on importation 39,150.00 Total cost, Jordanian dinar (JD) 365,400.00

Resale fee in Jordan 80,388.00 Resale price to Saudi Arabian, in JD 445,788.00

Price paid in Iraqi dinar, converting JD to SRI 2,361,165.25 (spot rate (SRI/JD) x Resale price to Saudi Arabian (JD) )

US dollar equivalent of final price paid $ 629,644.07

A European-based manufacturer ships a machine tool to a buyer in Jordan. The purchase price is €375,000. Jordan imposes a 12% 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 22%. Given the following spot exchange rates on May 24, 2004, 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?

Purchase price, in euros (€)Spot rate of exchange, Jordanian dinar per euro (JD/€)

Problem 3.14 Chinese Yuan Revaluation

Calculation of Percentage Change in Value ValuesInitial 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

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/$?

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%.

Problem 3.15 Vietnamese Coffee Coyote

Assuming an intial cash amount for exchange to dong of: $10,000.00Vietnamese

Assumptions Values dong proceedsVietnamese bank rate (dong/$) 14,000 Bank commission (%) 1.50% 137,900,000 Saigon Airport Exchange Bureau rate (dong/$) 13,800 Airport comission (%) 2.00% 135,240,000 Hotel Exchange Bureau rate (dong/$) 13,750 Hotel comission (%) 1.50% 135,437,500

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?

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.