Problem 2.1 Albert's Trip to Canada
Albert visits Toronto and buys 1.74 Canadian dollars (CAD) for one British
pound (GBP). When he returns home to the U.K., he converts CAD1 into
GBP0.59. Is the new exchange rate favorable or unfavorable?
Assumptions
Values
Buy Canadian dollars for (CAD/£)
Which is equivalent, the reciprocal (£/CAD)
1.7400
£0.5747
Buy back pounds for (£/CAD)
Which is equivalent, the reciprocal (CAD/£)
£0.5900
1.6949
It is better to convert back his remaining Canadian dollars to GBP when he
reaches back home.
Problem 2.2 Lottery Winner
Aisha lives in Melbourne, Australia. She wins €150 in an online lottery on
Thursday and wishes to convert the amount into Australian dollars (AUD). If the
exchange rate is 0.5988 euros per AUD, how many AUDs does she get, and what
is the value date of the AUD payment?
Assumptions
Cross rate (euros/AUD)
Prize amount in euros
What is the amount in AUD?
(the euro amount divided by the cross exchange rate)
Values
0.5988
150.00
AUD 250.50
Cross exchange rate transactions are settled in two business days, so in this case,
Monday.
Problem 2.3 Gilded Question
In 1923, one ounce of gold cost 380 French francs (FRF). If, at the same time one ounce
of gold could be purchased in Britain for GBP4.50, what was the exchange rate between
the French franc and the British pound?
Assumptions
Price of an ounce of gold in French frans (FRF/oz)
Price of an ounce of gold in Sterling Pounds (GBP/oz)
What is the implied GBP/FRF rate?
(GBP price of an ounce / FRF price of an ounce)
…. Or if expressed as FRF/GBP
Values
FRF 380.00
4.50
0.01
FRF 84.4444
Problem 2.4 Brent Oil
In 2015 one barrel of Brent oil traded for GBP 42.5 and South Africa rands (ZAR) 790. What is
the exchange rate between the pound and the rand? How would the exchange rate change if the oil
price jumps to GBP 50/barrel (assume no change in the price in S. Africa)?
Assumptions
Price of an ounce of gold in GBP (£/barrel)
Price of an ounce of gold in S. African rands (ZAR/barrel)
What is the implied ₤/ZAR exchange rate?
(GBP price of an ounce / ZAR price of an ounce)
Brent Oil
Values
£42.50
ZAR 790.00
What If
£50.00
ZAR 790.00
£0.0538
£0.0633
Problem 2.5 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
Original Import Price in British pounds
Values
197.00
190.00
1,650,000
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 2.6 Online Shopping
Tamara lives in Egypt and has placed a bundle of items in her Amazon.co.uk account
basket. She has the choice to pay in Egyptian pounds (EGP 1844) or in GBP
(151.17). What is the exchange rate between both currencies? In which currency
should she pay?
Assumptions
Egyptian pound price of basket (EGP)
British pound price of basket (GBP)
Values
1,844.00
151.17
Implied exchange rate (EGP/£)
12.1982
Many emerging markets that suffer from foreign exchange shortages have more than
one exchange rate . The official exchange rate is the one officially transacted by the
banking system. However, there is usually a parallel foreign exchange market where
the foreign currency is usually cheaper. Tamara should weigh both of these rates
before making her decision.
Problem 2.7 Israeli Shekel Changes Value
One British Pound (GBP) traded against Israeli Shekels (ILS) 5.82 in 2013,
but the exchange rate rose to 6.78 in late 2014. What is the percentage
change of the ILS? Has the shekel depreciated or appreciated?
Calculation of Percentage Change in Value
Initial exchange rate (ILS/£)
New exchange rate (ILS/£)
Percentage change in shekel value
(ending rate - beginning rate) / (beginning rate)
As the exchange rate rises, the British pound is able to
buy more shekels. Thus, the shekel has depreciated by
16.49%.
Values
5.82
6.78
16.49%
Problem 2.8 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$/$
Values
8.28
8.11
7.80
Original HK$/Yuan cross rate
HK$/Yuan = (HK$/$) x ($/Yuan)
0.9420
New HK$/Yuan cross rate
HK$/Yuan = (HK$/$) x ($/Yuan)
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 2.9 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/$)
Values
8.11
20.00%
6.76
Initial exchange rate, post official revaluation (Yuan/$)
Percentage revaluation against the US dollar
Revalued exchange rate (Yuan/$)
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 2.10 TEXPAK (Pakistan) in the UK
TEXPAK is a Pakistani-based textile firm that is facing increasing competition from other
manufacturers in emerging markets selling in Europe. All garments are produced in
Pakistan, with costs and pricing initially stated in Pakistani rupees (PKR), but converted to
British pounds (GBP) for distribution and sale in the United Kingdom. In 2014, one suit
was priced at PKR 11,000 with a British pound price set at GBP95. In 2015, the GBP
appreciated in value versus the PKR, averaging PKR120/GBP. In order to preserve the
GBP price and product profit margin in rupees, what should the new rupee price be set at?
Assumptions
Original (2014) unit price, rupees (PKR)
Original (2014) British pound price for sale and distribution
Average spot rate for 2015, rupees per pound
Values
11,000.00
95.00
120.00
First, the implied spot exchange rate for the previous year, 2014 must be found by dividing
the PKR price by the GBP price selected for distribution and sale.
Implied original spot rate, PKR/GBP
115.79
Assuming that TEXPAK wishes to preserve the British price for competitiveness, the same
Britsh pound price must be converted back into Pakistani rupees with the new spot
exchange rate in rupees per GBP:
Recalcualted Pakistani rupee price of product
(Original GBP price x Avg spot rate for 2015)
11,400.00
Because the Pakistani rupee depreciated in value against the GBP, the implied PKR price is
actually HIGHER than it was the previous year. This means that TEXPAK would keep the
same British pound price and either enjoy a much larger profit margin in PKR, or
potentially keep the PKR price the same as the previous year and actually reduce the GBP
price.
Problem 2.11 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?
Currency Exchange
Vietnamese bank rate
Saigon Airport exchange bureau rate
Hotel exchange bureau rate
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 (%)
Rate
d19,800
d19,500
d19,400
Commission
2.50%
2.00%
1.50%
$10,000.00
Values
19,800
2.50%
19,500
2.00%
19,425
1.50%
Vietnamese
dong proceeds
193,050,000
191,100,000
191,336,250
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.
Problem 2.12 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
Date of Spot Rate
Monday
Tuesday
Wednesday
$170.00
British pound
Spot Rate
(£/$)
0.5702
0.5712
0.5756
Euro
Spot Rate
(€/$)
0.8304
0.8293
0.8340
British pound
train fare
(£)
£96.93
£97.10
£97.85
Continental
train fare
(€)
€ 141.17
€ 140.98
€ 141.78
In an attempt to be neutral or impartial in its currency of pricing, the Chunnel has actually introduced a degree of currency
risk to all customers either British or Continental, as neither group counts the U.S. dollar as its home or domestic
currency. The day-to-day fluctuations in the dollar against the pound and the euro may seem relatively small over a three
day period, but over several weeks or months in recent years, the changes could have been significant in the eyes of
potential customers.
Problem 2.13 Barcelona Exports
Oriol Díez Miguel S.R.L., a manufacturer of heavy duty machine tools near Barcelona, ships an
order to a buyer in Jordan. The purchase price is €425,000. Jordan imposes a 13% import duty on
all products purchased from the European Union. The Jordanian importer then re-exports the
product to a Saudi Arabian importer, but only after imposing their own resale fee of 28%. Given the
following spot exchange rates on April 11, 2010, what is the total cost to the Saudi Arabian
importer in Saudi Arabian riyal, and what is the U.S. dollar equivalent of that price?
Spot Rate
JD 0.96/€
JD 0.711/$
SRI 3.751/$
Currency Crossrate
Jordanian dinar (JD) per euro (€)
Jordanian dinar (JD) per U.S. dollar ($)
Saudi Arabian riyal (SRI) per U.S. dollar ($)
Assumptions
Purchase price, in euros (€)
Spot rate of exchange, Jordanian dinar per euro (JD/€)
Spot rate of exchange, Jordanian dinar per dollar (JD/$)
Spot rate, Saudi Arabian riyal per Jordanian dinar (SRI/JD)
Jordanian import duty on EU products
Jordanian resale fees
Spot rate of exchange, Saudi Arabian riyal (SRI/$)
Values
€ 425,000
0.9600
0.7110
5.2751
13.00%
28.00%
3.751
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)
408,000.00
53,040.00
461,040.00
Resale fee in Jordan
Resale price to Saudi Arabian, in JD
129,091.20
590,131.20
Price paid in Iraqi dinar, converting JD to SRI
(spot rate (SRI/JD) x Resale price to Saudi Arabian (JD) )
U.S. dollar equivalent of final price paid
3,113,004.33
$
830,001.69