31 Mar For this assignment you need? to review a video lecture (please print the slides from the FX rate presentation Download presen
For this assignment you need to review a video lecture (please print the slides from the FX rate presentation Download presentation to follow along) that explains how to do currency conversions. Once you finish looking over at the presentation, then do the practice exercises Download practice exercises and look at the provided solution so that you check your work and make sure you feel comfortable doing currency conversions and that you understand the theory behind it (You should also read chapter 8 to complement this assignment).
When you are ready to start the assignment, download the PDF file Download PDF file, print a couple of copies and start working the problems. Please make sure that the copy that you submit to be graded is a clean and legible copy. Make sure you clearly mark your answer and that you include the "units" in your answer to receive full credit.
Once you have your assignment ready to submit, scan the file into a PDF format and upload the file.
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Assignment #2 — 50 Points– In this assignment, you will need to convert currencies using either a cross table or individual exchange rate quotes. You should have reviewed the additional Foreign Exchange Market PowerPoint slides and you should have practiced doing some conversions.
Please print this assignment and work your solutions in pen or pencil. You may want to print two sets so you can upload the cleanest copy you can to be graded. Please mark your answers well and don’t forget to use units (i.e. “dollars”, “GBP”, “Euros”, etc…). Round your final answer to two decimals.
Part 1 Use the following cross table to answer the first twelve questions (2 points each). The rates correspond to US Dollar, Euros, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar. Remember to read the table first across, then down the table. For example, 1 EUR is equal to 1.4905 AUD; or the inverse being 1 AUD is equal to 0.6709 EUR.
1. Of the currencies listed, which one is strongest against the British Pound? Explain your answer.
2. The cross table shows the inverse of each exchange rate quote. If 1 USD is equal to 1.2591 CAD, what is the inverse of that? Show your work and explain what it means.
3. T-Rex Company based in the U.S. usually buys raw materials from an Australian supplier. How much would the order be in U.S. dollars if the invoice is for $15,450.00 AUD?
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4. T-Rex Company is looking for alternative suppliers in Japan. The supplier’s quote is for 1,355,190 JPY. What would this be in U.S. dollars? Which supplier should T-Rex buy from, the Australian or Japanese?
RF Industries is a U.S. company doing business around the world. At the end of the first quarter (March 31st) it decides to bring back home the profits from three of its subsidiaries in Switzerland, England and Canada. How much revenue does RF Industries have in U.S. dollars given the following figures? (hint: convert each one and then add them up)
5. Switzerland: 24,860 CHF
6. England: 32,790 GBP
7. Canada: 25,588 CAD
8. Total Profit in USD:
Marie Josee makes famous custom shirts that are sold all over the world from Canada. She wants to make sure her revenue (sales price) for the shirts is equivalent to $45 CAD in every country. What should be the sales price for the shirts in the following countries? (hint: convert to the local currency!)
9. European Union
10. Japan
11. Australia
12. Without considering any other costs (shipping, taxes, tariffs, etc…), which country would it be the best market for Mariee Josee’s shirts? Which one gives her the most revenue? Explain your answer to receive credit.
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Part 2 FOR THE FOLLOWING QUESTIONS, USE THE EXCHANGE RATE QUOTE OR OTHER INFORMATION THAT IS PROVIDED IN EACH QUESTION (3 POINTS EACH).
A Mexican company manufactures televisions sets by importing materials into the country and then exporting the finished product to the United States. The cost per unit in Mexican Pesos of the components and materials needed for the TV are as follows:
a) Microchips from China: 5,300 MXN (Mexican Pesos) b) Screen from Northern Mexico: 2,730 MXN c) Plastics from India: 3,565 MXN d) Electronics from U.S.: 2,342 MXN
13. What is the total cost of the television set in U.S. dollars if labor cost per unit (per TV) is 1,599
MXN? The exchange rate is 20.37 MXN per USD.
14. What should be the Sales price in USD if the company wants to have a 26% gross margin?
15. What should be the Sales Price for the same TV if sold in Brazil? The desired gross margin in the Brazilian Market is 20%. The exchange rate is R$0.32 (BRL Brazilian Real) per Mexican Peso.
16. If the same Mexican manufacturer finds a new supplier for Microchips coming from Japan at a
cost per unit of 25,255.57 JPY, and the exchange rate is 5.87 JPN per MXN, what is the difference in price in Mexican Pesos for the microchips from the new supplier?
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You are ready to take a vacation abroad! You decide you are going to England. You need to make a few decisions before you go, and some while over there:
17. Should you use your credit card to pay for your expenses while in London (your bank’s exchange rate is 0.65 GBP per USD) or should you exchange money at home at a rate of 0.75 GBP per USD? Explain your answer.
18. Your vacation package gives you the option to pre-pay now or pay once you get there. The US dollar’s value is expected to decrease/depreciate in the near future. Should you pre-pay or pay later? What would be a better deal? Explain your answer.
19. You are looking to stay at a nice hotel at a nightly rate of 150 GBP. What is the cost of the hotel in USD if the exchange rate at that time is 1.45 USD per GBP?
20. You are done with you vacation and you are about to go back to the U.S. Where should you exchange your GBP back to USD; at the hotel at 0.80 GBP per USD or at the local bank for 0.72 GBP per USD?
Answer the following question (2 points)
The local exchange house in Argentina has two quotes on the window for USD:
Buy: 108.95 Sell: 109.95
21. How many Argentinian Pesos will you get if you go to exchange $400 USD?
- Part 1
- Part 2
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Use the following exchange rates to answer the questions below. Round your answers to two decimals.
Exchange rate quotes:
British Pounds (£) to Euros (€): £1 = €1.17
British Pounds (£) to US Dollars ($): £1 = $1.52
1. How many pounds is $5 worth?
2. How many dollars is £70 worth?
3. How many pounds is €65 worth?
4. How many pounds is $275 worth?
5. How many pounds is €465 worth?
6. How many euros is £520 worth?
7. How many euros is £1850 worth?
8. How many euros is $4355 worth?
Read the following cross table and answer the questions below
9. What is the exchange rate of US Dollars (USD) to British Pounds (GBP)?
10. What is the exchange rate of Euros (EUR) to Japanese Yen (JPY0?
11. What currencies are worth more than the U.S. Dollar?
12. While visiting Australia you visit 3 different banks to find out their exchange rates. Which bank is a better option for you to exchange your US Dollars? How much AUD do you get per dollar? The bank rates are the following:
Bank “B”
BUY: 1.50
SELL: 1.60
Bank “A”
BUY: 1.40
SELL: 1.50
Bank “C”
BUY: 1.60
SELL: 1.70
13. In which bank should you exchange your AUD back to USD before going back home? Why?
SOLUTIONS:
Use the exchange rates £1 = €1.17 and £1 = $1.52 to solve the following currency conversion problems. Round your answers to two decimals.
1. How many pounds is $5 worth? 3.28 pounds
2. How many dollars is £70 worth? 106.4 dollars
3. How many pounds is €65 worth? 55.55 pounds
4. How many pounds is $275 worth? 180.92 pounds
5. How many pounds is €465 worth? 397.43 pounds
6. How many euros is £520 worth? 608.40 euros
7. How many euros is £1850 worth? 2164.50 euros
8. How many euros is $4355 worth? 3552.20 euros
9. 1 USD = 0.7780 Pounds OR 1 GBP = 1.2854 US dollars
10. 1 EUR = 127.9494 JPY OR 1 JPY = 0.0078 EUR
11. EUR and GBP
12. Bank “C”; you get 1.60 AUD per USD
13. Bank “A”; you need less AUD to buy a dollar. In “A” you pay 1.50 AUD to get 1 USD.
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The Foreign Exchange Market
(Forex or FX)
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Foreign Exchange
An exchange rate is the price of a currency in terms of another
Exchange rates are expressed in pairs
Money is bought/sold in a market (Forex, FX).
We buy/sell currencies to buy/sell products in foreign markets (or to invest)
Exchange rates change rapidly (appreciate/depreciate)
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Foreign Exchange
Exchange rates may change due to
Change in supply/demand
Products become more/less desirable
Stability of monetary system, strength of the economy
Three factors impact future exchange rate movements
A country’s price inflation
A country’s interest rate
Market psychology
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Forex is the largest, most liquid market in the world
$5.5 Trillion per day …. Or $220 Billions per hour!
USD makes up the majority of transactions
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How to do currency conversions?
You need a “ foreign exchange quote”. The price of 1 currency given in terms of another.
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You can look up foreign exchange quotes in the newspaper under the business section or look online. Many websites will give you a quote that reflects the last quote of the prior day.
For example, go to this website to check the different rates of US Dollar to other world currencies:
https://www.x-rates.com/table/?from=USD&amount=1
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Currency Codes
U.S. Dollar = USD
Mexican Peso = MXN
Canadian Dollar = CAD
British Pound = GBP
Euro = EUR
Japanese Yen = YEN
Australian Dollar = AUD
Chinese Yuan = CNY
…..
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Currency Symbols
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FX Quotes
Cross Tables
Read the table from top to bottom. For example, 1 US Dollar is equal to 1.22 Canadian dollars; 1 US Dollar is equal to 118.91 Japanese Yen; 1 USD is equal to 15.22 Mexican pesos; etc…..
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FX Quotes
Listing in newspaper
EUR/USD = 1.1319
Base currency
means that for every Euro you get 1.13 U.S. Dollars
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Newspapers will usually show quotes like these. The base currency (1 unit) goes first, the foreign currency is second. In this example, the quote reads:
EUR/USD = 1.1319, which means that for every 1 EURO you get 1.1319 U.S. Dollars
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FX Quotes
Quotes can be expressed in different ways:
EUR/USD 1.1319
1.1319 USD per EUR
1 EUR = 1.1319 USD
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Other ways of expressing foreign exchange rate quotes.
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Example of exchange rate quote:
10 MXN per USD
It means that 10 Mexican pesos equal to 1 U.S. Dollar
How much is 2 USD in MXN?
(2*10=20) 20 MXN
How much is 100 MXN in USD?
(100/10=10) 10 USD
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Example of exchange rate quote:
10 MXN per USD
Proportion or Ratio:
=
X = =
X =
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To solve it you simply do a ratio or proportion. Once you have the proportion you can solve for the unknown, or “X”.
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Example of exchange rate quote:
10 MXN per USD
Proportion or Ratio:
=
X = =
X =
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Example of exchange rate quote:
20.5 MXN per USD
It means that 20.5 Mexican pesos equal to 1 U.S. Dollar
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A more realistic quote for the Mexican peso and the US dollar
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Do a ratio or proportion!
20.5 MXN per USD
Convert $50 USD to MXN:
=
X = 50 (20.5) / 1
X = 1025 / 1
X= 1,025 MXN
20.5 MXN per USD
Convert $50 USD to MXN
=
X = 50 (20.5) / 1
X = 1025 / 1
X= 1,025 MXN
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As long as you set the proportion correctly, it doesn’t matter which currency goes on top or on the bottom. Always compare “orange to oranges” and “apples to apples”. IF you put USD on top, then the other ratio should have USD on top. Or in the second example, pesos on top in both ratios and dollars on the bottom for both ratios being compared!
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Foreign Exchange (inverse)
20.5 MXN per USD
Convert $50 USD to MXN:
=
X = 50 (20.5) / 1
X = 1025 / 1
X= 1,025 MXN
0.048780488 USD per MXN
Convert $50 USD to MXN:
=
X= 1(50) / (0.048780488)
X = 50/0.048780488
X= 1,025 MXN
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You can also express the inverse of the quote and you would get the same answer.
In the example on the left, the quote is pesos per dollars (20.5 MXN per USD). In the right, we see the inverse: Dollars per Pesos (0.4878 USD per MXN).
The result of converting $50 USD to pesos is the same no matter which quote you use.
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Foreign Exchange Dollars to British Pounds
$1USD = £0.5
Convert $40 USD to GBP:
Will I have MORE GBP or LESS GBP after I do my conversion? (is my answer more than 40 or less?)
Less!
(40*0.5= 20 GBP)
£1.00 = $1.55 USD
If I was converting 50 Pounds to U.S…….
Would I have MORE USD or LESS USD after I do my conversion?
More!
(50*1.55= 77.5 GBP)
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Foreign Exchange
$1USD = £0.5
Convert $300 GBP to USD
Will I have MORE USD or LESS USD after I do my conversion? (is my answer more than 300 or less?)
More!
(300/0.5= 600 GBP)
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Foreign Exchange
Always set up your ratios correctly!
“Apples with apples, oranges with oranges”….. Or in other words…. USD with USD, GBP with GBP, Pesos with Pesos.
If you don’t…. Then your math will be wrong!
In this example…..
Notice that dollars are on top on both sides of the equation and AUD are in the bottom on both sides.
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If quote today is:
1.0950 CAD per USD
… and quote tomorrow is:
2.9990 CAD per USD
Which currency appreciated? The USD appreciated in relation to the CAD
(you get more CAD for the same 1 USD)
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The USD appreciated in relation to the CAD. In other words, you need MORE Canadian Dollars “tomorrow” to get the same 1 USD. The Canadian dollar DEPRECIATED against the USD and/or the USD APPRECIATED against the CAD
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Where can I exchange currency when I travel?
At your bank, at an exchange house at the airport, at exchange house in the city, or using your credit card
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At exchange rate businesses you will see a board with different “quotes”. You may be familiar with those boards at airports, banks, hotels. Or you can use your credit card and the bank will record the exchange rate of the day of the transaction and you’ll be charged in your home currency. Sometimes the bank rate is not in your favor; depends on your bank and your type of card. Beware of “international transaction fees” as well!
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I see 2 quotes listed at the bank…. Which quote do I use? It depends!
In this example, the Mexican bank’s quotes say:
BUY: 20.5
SELL: 21.5
The bank is showing what THEY are willing to trade for….
When they BUY U.S. Dollars, they pay 20.5 pesos per every 1 dollar
When they SELL U.S. dollars, they ask for 21.5 pesos
20.5
21.5
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It depends!
If you have USD that you want to exchange to Mexican Pesos…. The bank would BUY your USD. You would get 10.5 pesos per every dollar.
If you have MEXICAN PESOS that you want to exchange to dollars, the bank would SELL you USD. You would pay 21.5 pesos for every dollar.
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Which one is better?
Exchange House “A”:
BUY: 20.5
SELL: 21.2
Exchange House “B”:
BUY: 21.0
SELL: 21.5
If I am changing my USD to Mexican Pesos…. I want to get MORE pesos….. So I would go to “B”.
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I get more PESOS (21.0) at “B”. If I had gone to “A”, I would only get 20.5 pesos for every dollar.
This is obviously more important as the number of dollars exchanged increases. While the difference in one dollar exchanged may not seem like much, what if you were exchanging $500,000 USD? Then the difference would be significant!
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Which one is better?
If I am changing my Mexican Pesos to USD…. I want to pay LESS pesos for every dollar….. So I would go to “A”.
Exchange House “A”:
BUY: 20.5
SELL: 21.2
Exchange House “B”:
BUY: 21.0
SELL: 21.5
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In this example, “A” gives me a better rate. I would pay only 21.2 pesos for every dollar, where in “B” I would have to pay 21.5 pesos for every dollar.
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When Do Firms Use The Foreign Exchange Market?
International companies use the foreign exchange market when
the payments they receive for exports, the income they receive from foreign investments, or the income they receive from licensing agreements with foreign firms are in foreign currencies
they must pay a foreign company for its products or services in its country’s currency
they have spare cash that they wish to invest for short terms in money markets
they are involved in currency speculation – the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates
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What do you need to know?
What is an exchange rate and how to express it
Common currency codes and symbols
How to read cross tables
How to do currency conversions
Understand appreciation/depreciation of currencies
Understand how changes in value of currencies impact companies and consumers
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