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Problem 3.

1 Brussels and New York
In Brussels, one can buy a U.S. dollar for €0.8200. In New York, one can buy a euro for $1.22. What is the foreign exchange rate between the dollar and the euro? Assumptions Buy a US dollar in Brussels for (€/$) Which is equivalent, the reciprocal ($/€) Buy a euro in NY for ($/€) Which is equivalent, the reciprocal (€/$) Values 0.8200 $1.2195 $1.2200 € 0.8197

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

50 -41.2 pesos per dollar to 5.2 Mexican Peso Changes In December 1994 the government of Mexico officially changed the value of the Mexican peso from 3. so its value is less or devalued.Problem 3. dollar.S. .5 pesos per dollar. a devaluation. devaluation. What was the percentage change in its value? Was this a depreciation. If that is the case. any change in its official value must be either a "revaluation" or "devaluation." In this case. appreciation.ending rate) / (ending rate) Values 3.20 5. this is indicated by the negative percentage change. This is evident from the fact that it now takes more pesos per U. In terms of the percentage change calculation. it is a managed or fixed exchange rate.82% Anytime a government sets or resets the value of its currency. or revaluation? Explain. Calculation of Percentage Change in Value Initial exchange rate (peso/$) New exchange rate (peso/$) Percentage change in peso value (beginning rate .

what was the exchange rate between French francs and U.00 0.67 was needed to buy one ounce of gold. Or if expressed as $/FF $ Values $20.3 Gold Standard Before World War I. $20.00.67 310. at the same time one ounce of gold could be purchased in France for FF310.00 15. dollars? Assumptions Price of an ounce of gold in US dollars ($/oz) Price of an ounce of gold in French francs (FF/oz) What is the implied French franc/US dollar exchange rate? (French franc price of an ounce / US dollar price of an ounce) …. If.S.0667 .Problem 3.

2474 $4.67.S. while the price of that same ounce of gold in British pounds was £4.2474 $8.2474.9466 . dollar price had been $38. What would the exchange rate between the dollar and the pound be if the U.67 £4.00 per ounce? Gold Standard Values $20. dollars was $20.8665 Assumptions Price of an ounce of gold in US dollars ($/oz) Price of an ounce of gold in British pounds (₤/oz) What is the implied $/₤ exchange rate? (dollar price of an ounce / pound price of an ounce) What If $38.Problem 3. the price of an ounce of gold in U.4 Good as Gold Under the gold standard.00 £4.S.

Problem 3. so in this case.45 Spot transactions are settled in two business days.588.00 32.000 spot from your bank on Monday. If your company buys Ps350.5 Mexican Peso Spot Rate The spot rate for Mexican pesos is Ps10.74/$.000. . how much must your company pay and on what date? Assumptions Spot rate on Mexican peso (pesos/US$) Your company buys this amount of pesos What is the cost in US$? (the peso amount divided by the spot exchange rate) $ Values 10.7400 350. Wednesday.

28 8. the Hong Kong dollar has fallen in value against the Chinese yuan. yuan/$ Revalued Chinese yuan to the dollar.S.11 7. yuan/$ Hong Kong dollar peg to the US dollar. dollar from Yuan8. how did the value of the Hong Kong dollar change against the yuan? Assumptions Original Chinese yuan peg to the dollar.80 0.9420 0.28/$ to Yuan8. dollar at HK$7.6 Hong Kong Dollar and the Chinese Yuan The Hong Kong dollar has long been pegged to the U. When the Chinese yuan was revalued in July 2005 against the U.S.9618 As a result of the revaluation of the Chinese yuan. .11/$. HK$/$ Original HK$/Yuan cross rate HK$/Yuan = (HK$/$) x ($/Yuan) New HK$/Yuan cross rate HK$/Yuan = (HK$/$) x ($/Yuan) Values 8.Problem 3.80/$.

99. Federal Reserve Alan Greenspan’s memoir.45.99 1. "The Age of Turbulence.gained parity with the dollar in 2007.S.45 20. the prices of many of the same goods and services in the marketplace still implied a much weaker Canadian dollar. Although the Canadian dollar was quoted in the currency markets at equal value with the US dollar (1 C$ = 1 $).the Loonie -.7 Loonie Parity If the price of former Chairman of the U. .2601 This simple book price is representative of what so many Canadians were unhappy about after the Canadian dollar -.Problem 3." is listed on the dust-jacket as C$26. but costs just US$20. what exchange rate does that imply between the two currencies? Assumptions Canadian dollar list price of book (C$) US dollar list price of book ($) Implied exchange rate (C$/$) Values 26.

000.06 If Porsche was going to earn a 20% margin on Panamera sales in Europe.00 Margin (. € 110.4400 a.2 x price) € 24. Price € 120. what would be its projected price in the United States? Price in euros in Europe x spot rate ($/€) $172. At this price they believed the company stood to earn a 20% margin on each car.46% .000.000.4240 € 110.06 12. the cost of the Panamera had to be 80% of of price.4400/€. Although pricing is not yet set.000.06 -€ 96.00 20.8 x price) -€ 96.0% 1. if the effective price earned on US sales was: and the cost was as calculated above Margin would then be or in percentage This would be a substantially smaller margin than that earned in Europe.000.955.000.955.800 b.000 1.Problem 3. some automotive analysts believe the basic production model will be sold in Europe at a price of €120. If the price in the US market was set at $158.8 Porsche Pricing (A) Porsche plans on introducing a new four-door luxury automobile in 2009 called the Panamera. what would the margin on the Panamera be? Price in US market spot exchange rate ($/€) Effective price in euros (P$ ÷ $/€) $158. Assumptions Porsche Panamera price in Europe in 2009 (€) Expected margin on the Panamera on European sales Spot exchange rate in 2009 ($/€) Values € 120. If the spot rate in 2009 was $1.4240/€.000.00 Now.955.00 € 14.00 Cost (. and the spot exchange rate averaged $1.

000. to say the least. dollar price is held constant since its introduction in January 2009 at $158.00 Now. If the dollar continues to fall throughout the year.77 -€ 96.8 x price) -€ 96.000.000. € 97.? Assumptions Porsche Panamera price in Europe in 2009 ( €) Expected margin on the Panamera on European sales Average Spot exchange rate in 2009 ($/€) Values € 120.230.S. but the U. what would be the profit margin on each car sold in the U.6250 If the price in the US market was set at $158. if the effective price earned on US sales was: and the cost was as calculated above Margin would then be or in percentage Not a good margin.6250/€.00 Cost (.230.000.03% .000.77 If Porsche was going to earn a 20% margin on Panamera sales in Europe.00 € 1.0% 1.9 Porsche Pricing (B) Using the same basic data as in the previous problem.S.000. the cost of the Panamera had to be 80% of of price. and the spot rate in 2009 averages $1.6250/€. what would the margin on the Panamera be? Price in US market spot exchange rate ($/€) Effective price in euros (P$ ÷ $/€) $158.6250 € 97.00 Margin (.000 1.77 1.00 20.2 x price) € 24. and the spot exchange rate averaged $1.Problem 3.000.230. consider the following. Price € 120.

375.10 Toyota Exports to the United Kingdom Toyota manufactures most of the vehicles it sells in the United Kingdom in Japan.684.63 8.000. Japanese yen/British pound Export price of Toyota Tunda truck. Japanese yen/British pound New spot rate. The spot rate of the Japanese yen against the British pound has recently moved from ¥197/£ to ¥190/£.68% Because the price of the truck itself did not change.Problem 3. . The base platform for the Toyota Tundra truck line is ¥1. How does this change the price of the Tundra to Toyota's British subsidiary in British pounds? Assumptions Original spot rate.00 1.650.00 190. 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. Japanese yen Values 197.Old price / Old price 8.000 Original Import Price in British pounds Export price in yen / Original spot rate in yen/pound New Import Price in British pounds Export price in yen / New spot rate in yen/pound Percentage change in the price of the imported truck New price .21 3.650.

50 First. . one of its rapidly growing markets. the same Brazilian reais price must be converted back into Indian rupees with the new spot exchange rate in rupees per reais: Recalcualted Indian rupee price of product (Original reais price x Avg spot rate for 2005) 14. what should the new rupee price be set at? Assumptions Original (2004) cholesterol unit price. All product is produced in India.50 Because the Indian rupee depreciated in value against the Brazilian reais. an India-based pharmaceutical firm. but converted to Brazilian reais (R$) for distribution and sale in Brazil.15 Assuming that Ranbaxy wishes to preserve the Brazilian reais price for competitiveness. the implied spot exchange rate for the previous year. averaging Rps17.437.500. rupees per reais Values 12. rupees (Rps) Original (2004) Brazilian reais price for sale and distribution Average spot rate for 2005. In 2004 the unit volume was priced at Rps12. with a Brazilian reais price set at R$825.11 Ranbaxy (India) in Brazil Ranbaxy. But in 2005 the reais appreciated in value veruss the rupee. has continuing problems with its cholesterol reduction product's price in Brazil.5/R$. with costs and pricing initially stated in Indian rupees (Rps). 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.00 17.500. Implied original spot rate.00 825. the implied Indian rupee price is actually HIGHER than it was the previous year. 2004 must be found by dividing the Indian rupee price by the Brazilian reais price selected for distribution and sale.Problem 3. Indian rupees per Brazilian reais 15. In order to preserve the reais price and product profit margin in rupees.

dollar as its home or domestic currency.93 £97.8340 British pound train fare (£) £96.12 Chunnel Choices The Channel Tunnel or "Chunnel" passes underneath the English Channel between Great Britain and France. The day-to-day fluctuations in the dollar against the pound and the euro may seem relatively small over a three day period. For example. however.8293 0.Problem 3. the changes could have been significant in the eyes of potential customers.85 Continental train fare (€) € 141. dollars (USD). . What is the British pound and euro denominated prices for the USD170.5712 0. but over several weeks or months in recent years.98 € 141.5756 Euro Spot Rate (€/$) 0. the other euros.10 £97. One side is therefore an economy of British pounds.00 round trip fare in local currency if purchased on the following dates at the accompanying spot rates drawn from the Financial Times? Round trip RailEurope train fare $170.5702 0.8304 0. a landlink between the Continent and the British Isles. If you were to check the Chunnel's rail ricket Internet rates you would find that they would be denominated in U.00 British pound Spot Rate (£/$) 0. as neither group counts the U.78 Date of Spot Rate Monday Tuesday Wednesday In an attempt to be neutral or impartial in its currency of pricing. This currency neutrality. a first class round trip fare for a single adult from London to Paris via the Chunnel through RailEurope may cost USD170.S.00.S. means that customers on both ends of the Chunnel pay differing rates in their home currencies from day to day.17 € 140. the Chunnel has actually introduced a degree of currency risk to all customers either British or Continental.

13 Middle East Exports A European-based manufacturer ships a machine tool to a buyer in Jordan.644. The Jordanian importer then re-exports the product to a Saudi Arabian importer. in euros (€) Spot rate of exchange.000 0.165. Jordanian dinar (JD) Resale fee in Jordan Resale price to Saudi Arabian.25 629. Jordanian dinar per dollar (JD/$) Spot rate.07 . Jordanian dinar per euro (JD/€) Spot rate of exchange. Saudi Arabian riyal per Jordanian dinar (SRI/JD) Spot rate of exchange.Problem 3. Saudi Arabian riyal (SRI/$) Jordanian import duty on EU products Jordanian resale fees What is the dollar price after all exchanges and fees? Purchase price.00 445. Jordan imposes a 12% import duty on all products purchased from the European Union.00% 22. The purchase price is €375. converted to Jordanian dinar (JD) Additional fees due on importation Total cost.361.2966 3. what is the total cost to the Saudi Arabian importer in Saudi Arabian riyal.388.150.400. converting JD to SRI (spot rate (SRI/JD) x Resale price to Saudi Arabian (JD) ) US dollar equivalent of final price paid $ Values € 375.00 80.S.00 39.788.00 2.000. and what is the U.750 12.00% 326. 2004. but only after imposing their own resale fee of 22%. Given the following spot exchange rates on May 24.00 365.7080 5.250. dollar equivalent of that price? Assumptions Purchase price. in JD Price paid in Iraqi dinar.8700 0.

post official revaluation (Yuan/$) Percentage revaluation against the US dollar Revalued exchange rate (Yuan/$) Values 8.11 20. 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 8.00% 6. but also be revalued by 20% or 30%.00% 6.76 8.S. it is clear why so many critics of the Chinese yuan policy were not particularly happy with the revaluation of only 2. .14 Chinese Yuan Revaluation Many experts believe that the Chinese currency should not only be revalued against the U.Problem 3.11/$? Calculation of Percentage Change in Value Initial exchange rate. dollar as it was in July 2005.1%.11 30. post official revaluation (Yuan/$) Percentage revaluation against the US dollar Revalued exchange rate (Yuan/$) Initial exchange rate.24 As painfully obvious.

VND or d.000.Problem 3.437.000 135.50% 13. If you were a traveling coffee buyer for the wholeale market (a "coyote" by industry terminology). its lower comission makes it preferable over the combined airport rate.240.900.800 2. . is managed against the U.S. second only to Brazil.00% 13.00 Values 14.500 The combined exchange rate and commission offered in the commercial banks in Vietnam is the better rate. which of the following currency rates and exchange commission fees would be in your best interest if traveling to Vietnam on a buying trip? Assuming an intial cash amount for exchange to dong of: Assumptions Vietnamese bank rate (dong/$) Bank commission (%) Saigon Airport Exchange Bureau rate (dong/$) Airport comission (%) Hotel Exchange Bureau rate (dong/$) Hotel comission (%) $10. The Vietnamese dong. although its exchange rate is slightly weaker than the airport.15 Vietnamese Coffee Coyote Many people were surprised when Vietnam became the second largest coffee producing country in the world in recent years.50% Vietnamese dong proceeds 137. dollar but is not widely traded. In the case of the Hotel Exchange Bureau rate.000 1.750 1.000 135.