# 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

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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                                                          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.
Problem 3.2 Mexican Peso Changes

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
devaluation, appreciation, or revaluation? Explain.

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)

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

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?

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)                           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
Problem 3.4 Good as Gold

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 £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?

Gold Standard
Assumptions                                                          Values               What If
Price of an ounce of gold in US dollars (\$/oz)                       \$20.67                \$38.00
Price 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)
Problem 3.5 Mexican Peso Spot Rate

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?

Assumptions                                                                 Values
Spot rate on Mexican peso (pesos/US\$)                                      10.7400

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.
Problem 3.6 Hong Kong Dollar and 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?

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)

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

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?

Assumptions                                                                    Values
Canadian dollar list price of book (C\$)                                        26.45
US dollar list price of book (\$)                                               20.99

Implied exchange rate (C\$/\$)                                                   1.2601

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)

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.

Assumptions                                                                         Values
Porsche Panamera price in Europe in 2009 (€)                                  € 120,000.00
Expected margin on the Panamera on European sales                                   20.0%
Spot exchange rate in 2009 (\$/€)                                                   1.4400

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 (\$/€)                                    \$172,800

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?

Price in US market                  \$158,000
spot exchange rate (\$/€)                    1.4240
Effective price in euros (P\$ ÷ \$/€)              € 110,955.06

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.
Price             € 120,000.00
Cost (.8 x price)             -€ 96,000.00
Margin (.2 x price)              € 24,000.00

Now, if the effective price earned on US sales was:               € 110,955.06
and the cost was as calculated above               -€ 96,000.00
Margin would then be                 € 14,955.06
or in percentage                   12.46%

This would be a substantially smaller margin than that earned in Europe.
Problem 3.9 Porsche Pricing (B)

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.?

Assumptions                                                                         Values
Porsche Panamera price in Europe in 2009 (€)                                  € 120,000.00
Expected margin on the Panamera on European sales                                   20.0%
Average Spot exchange rate in 2009 (\$/€)                                           1.6250

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?

Price in US market                   \$158,000
spot exchange rate (\$/€)                     1.6250
Effective price in euros (P\$ ÷ \$/€)                € 97,230.77

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.
Price             € 120,000.00
Cost (.8 x price)             -€ 96,000.00
Margin (.2 x price)              € 24,000.00

Now, if the effective price earned on US sales was:                 € 97,230.77
and the cost was as calculated above                -€ 96,000.00
Margin would then be                   € 1,230.77
or in percentage                     1.03%

Not a good margin, to say the least.
Problem 3.10 Toyota Exports to the United Kingdom

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?

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

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

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 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?

Assumptions                                                                          Values
Original (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

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.

Implied original spot rate, Indian rupees per Brazilian reais                          15.15

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:

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

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

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?

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

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

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 25, 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?

Assumptions                                                                               Values
Purchase price, in euros (€)                                                           € 375,000
Spot rate of exchange, Jordanian dinar per euro (JD/€)                                   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
Jordanian import duty on EU products                                                     12.00%
Jordanian resale fees                                                                    22.00%
Spot rate of exchange, Saudi Arabian riyal (SRI/\$)                                        3.750

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
Problem 3.14 Chinese Yuan Revaluation

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/\$?

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

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

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

Assuming an intial cash amount for exchange to dong of:                          \$10,000.00           You Choose

Vietnamese
Assumptions                                                                          Values             dong proceeds
Vietnamese 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

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.
Mini-Case: The Revaluation of the Chinese Yuan

1. What would the Chinese yuan's value be in U.S. dollars if it had indeed    Values
been revalued by 20%?

Initial exchange rate, pre revaluation (Yuan/\$)                                8.28
Percentage revaluation against the US dollar                                20.00%
Revalued exchange rate (Yuan/\$)                                                6.90

3. If the Chinese yuan were to change by the maximum allowed per day,         Values
0.3% against the U.S. dollar, consistently over a 30 or 60 day period, what
extreme values might it reach?

Initial exchange rate, post official revaluation (Yuan/\$)                      8.11
Percentage Revaluation per day                                               0.30%
Number of days of consistent revaluation                                         30
Extreme Revaluation: Spot rate at end of 30 days (Yuan/\$)                      7.41

Initial exchange rate, post official revaluation (Yuan/\$)                      8.11
Percentage Devaluation per day                                              -0.30%
Number of days of consistent Devaluation                                         30
Extreme Devaluation: Spot rate at end of 30 days (Yuan/\$)                      8.87

Initial exchange rate, post official revaluation (Yuan/\$)                      8.11
Percentage Revaluation per day                                               0.30%
Number of days of consistent revaluation                                         60
Extreme Revaluation: Spot rate at end of 30 days (Yuan/\$)                      6.78

Initial exchange rate, post official revaluation (Yuan/\$)                      8.11
Percentage Devaluation per day                                              -0.30%
Number of days of consistent Devaluation                                         60
Extreme Devaluation: Spot rate at end of 30 days (Yuan/\$)                      9.71

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