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.

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 was the percentage change in its value? Was this a depreciation, devaluation, appreciation, or revaluation? Explain. Calculation of Percentage Change in Value Initial exchange rate (peso/$) New exchange rate (peso/$) Percentage change in peso value (beginning rate - ending rate) / (ending rate) Values 3.20 5.50 -41.82%

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, $20.67 was needed to buy one ounce of gold. If, at the same time one ounce of gold could be purchased in France for FF310.00, what was the exchange rate between French francs and U.S. dollars? Assumptions Price of an ounce of gold in US dollars ($/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) . Or if expressed as $/FF $ Values $20.67 310.00 15.00

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 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? Gold Standard Values $20.67 4.2474 $4.8665

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 $38.00 4.2474 $8.9466

Problem 3.5 Mexican Peso Spot Rate

The spot rate for Mexican pesos is Ps10.74/$. If your company buys Ps350,000 spot from your bank on Monday, how much must your company pay and on what date? Assumptions Spot rate on Mexican peso (pesos/US$) 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 350,000.00 32,588.45

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/$, how did the value of the Hong Kong dollar change against the yuan? Assumptions Original Chinese yuan peg to the dollar, yuan/$ Revalued Chinese yuan to the dollar, yuan/$ Hong Kong dollar peg to the US dollar, HK$/$ Original HK$/Yuan cross rate HK$/Yuan = (HK$/$) x ($/Yuan) New HK$/Yuan cross rate HK$/Yuan = (HK$/$) x ($/Yuan) Values 8.28 8.11 7.80 0.9420

0.9618

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 Greenspans memoir, "The Age of Turbulence," is listed on the dust-jacket as C$26.45, but costs just US$20.99, what exchange rate does that imply between the two currencies? Assumptions Canadian dollar list price of book (C$) US dollar list price of book ($) Implied exchange rate (C$/$) Values 26.45 20.99 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 Porsche Panamera price in Europe in 2009 () Expected margin on the Panamera on European sales Spot exchange rate in 2009 ($/) Values 120,000.00 20.0% 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 $1.4240/, what would the margin on the Panamera be? Price in US market spot exchange rate ($/) Effective price in euros (P$ $/) $158,000 1.4240 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: 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. 110,955.06 - 96,000.00 14,955.06 12.46%

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 $158,000, what would be the profit margin on each car sold in the U.S.? Assumptions Porsche Panamera price in Europe in 2009 ( ) Expected margin on the Panamera on European sales Average Spot exchange rate in 2009 ($/) Values 120,000.00 20.0% 1.6250

If the price in the US market was set at $158,000, and the spot exchange rate averaged $1.6250/, what would the margin on the Panamera be? Price in US market spot exchange rate ($/) Effective price in euros (P$ $/) $158,000 1.6250 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: and the cost was as calculated above Margin would then be or in percentage Not a good margin, to say the least. 97,230.77 - 96,000.00 1,230.77 1.03%

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 Original spot rate, Japanese yen/British pound New spot rate, Japanese yen/British pound Export price of Toyota Tunda truck, Japanese yen Values 197.00 190.00 1,650,000

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 - Old price / Old price

8,375.63

8,684.21

3.68%

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 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? Assumptions Original (2004) cholesterol unit price, rupees (Rps) Original (2004) Brazilian reais price for sale and distribution Average spot rate for 2005, rupees per reais Values 12,500.00 825.00 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 (Original reais price x Avg spot rate for 2005) 14,437.50

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 landlink 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 $170.00 British pound Spot Rate (/$) 0.5702 0.5712 0.5756 Euro Spot Rate (/$) 0.8304 0.8293 0.8340 British pound train fare () 96.93 97.10 97.85 Continental train fare () 141.17 140.98 141.78

Date of Spot Rate Monday Tuesday Wednesday

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 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? Assumptions Purchase price, in euros () Spot rate of exchange, Jordanian dinar per euro (JD/) Spot rate of exchange, Jordanian dinar per dollar (JD/$) Spot rate, Saudi Arabian riyal per Jordanian dinar (SRI/JD) Spot rate of exchange, Saudi Arabian riyal (SRI/$) Jordanian import duty on EU products Jordanian resale fees What is the dollar price after all exchanges and fees? Purchase price, converted to Jordanian dinar (JD) Additional fees due on importation Total cost, Jordanian dinar (JD) Resale fee in Jordan Resale price to Saudi Arabian, in JD Price paid in Iraqi dinar, converting JD to SRI (spot rate (SRI/JD) x Resale price to Saudi Arabian (JD) ) US dollar equivalent of final price paid $ Values 375,000 0.8700 0.7080 5.2966 3.750 12.00% 22.00%

326,250.00 39,150.00 365,400.00 80,388.00 445,788.00 2,361,165.25

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/$? Calculation of Percentage Change in Value Initial exchange rate, post official revaluation (Yuan/$) Percentage revaluation against the US dollar Revalued exchange rate (Yuan/$) Initial exchange rate, post official revaluation (Yuan/$) Percentage revaluation against the US dollar Revalued exchange rate (Yuan/$) Values 8.11 20.00% 6.76 8.11 30.00% 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 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 (%) $10,000.00 Values 14,000 1.50% 13,800 2.00% 13,750 1.50% Vietnamese dong proceeds 137,900,000 135,240,000 135,437,500

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.