Foreign Exchange Competition
The purpose of this economic simulation is to:
1. Provide students with an insight into the workings of the foreign exchange market.
2. Gain an understanding of the terminology used in foreign exchange.
3. Create an interest in economics as a subject.
4. Develop decision making skills.
5. Be able to undertake the necessary calculations used in managing a currency portfolio.
6. Understand the factors that influence the value of a currency.
7. Become familiar with the different types of exchange rate systems.
8. Develop presentation and analytical skills.
9. Understand the role of the European Central Bank in the Eurozone.
Resources for Economics C Copeland
Foreign Exchange
Competition
Student_______________________
Fx
€
Buying
Investment
rate
Holding of
foreign
currency
Selling
€
Profit or
rate
Investment
Loss
1.
2.
3.
4.
5.
Total
€1m
Prediction for € \ $ exchange rate_________________
(Used in the event of a tie)
Resources for Economics C Copeland
Foreign Exchange
Competition
Using the ECB exchange rates page with spot rates, charts etc.
https://www.ecb.europa.eu/stats/exchange/eurofxref/html/index.en.html
1.
2.
3.
4.
Select currencies [2-5]
Minimum of 2 & maximum of 5.Minimum amount €100,000 in each currency selected.
Further amounts in units of €10,000
Buying your foreign currency. Multiply exchange rate [buying rate] by Euro investment =
holding of foreign currency.
Calculating the value of your currency portfolio. Divide holding of foreign currency by latest
exchange rate [selling rate] = value of investment [€]
Compare to the original Euro investment to calculate profit or loss.
Student Record
Fx
€
Investment
Buying
Holding
rate
of
foreign
Selling
€
rate
Investment
currency
1.
2.
3.
4.
5.
Total
€1m
Prediction for € \ $ exchange rate________________
(Used in the event of a tie)
Resources for Economics C Copeland
Profit
or
Loss
Understanding the Foreign Exchange Market
Exchange Rate
This is the external value of a currency, how much one unit of currency is worth in a
foreign currency. [€1 = $1.48]
Appreciation
This is a rise in the value of currency due to market forces, e.g. €1 = £.68 to €1 = £.93.
Depreciation
This is a fall in the value of currency due to market forces, e.g. €1 = £.68 to €1 = £.65.
Revaluation
This is where the central bank officially increases the value of currency,
e.g. €1 = £.68 to €1 = £.93.
Devaluation
This is where the central bank officially reduces the value of currency, e.g. €1 = £.68 to €1
= £.64. The last devaluation affecting the Irish economy was in January 1993 when the
Irish Punt was devalued by 10%.
Exchange Rate Systems
This determines how the value of a currency is determined. These systems can be fixed,
floating or a mixture of both.
Fixed Exchange Rate System
This is where the exchange is fixed at a certain rate and is not subject to market forces.
Examples of this are the Gold Standard and the Euro system 1999 to 2002. Countries can
also fix their exchange rate to another major currency, up until 1979 the Irish currency
was fixed at parity against sterling [IR£1 = ST£1] and the Chinese Yuan was fixed against
the US$ until recent times.
Floating Exchange Rate System
In this type of system the exchange rate is determined by market forces, i.e. supply and
demand for the currency. The rules of the market apply, a surplus will cause a fall in the
price of the currency [depreciation] while a shortage will cause a rise in the price of the
currency [appreciation].
Currency Risk
When trading in a floating exchange rate system there is a currency risk when exporting
and importing as well as in foreign borrowing. Trade is usually conducted on a credit basis
which means that at the end of the credit period the exchange rate may have changed
which can result in the seller or buyer losing money.
Resources for Economics C Copeland
Currency Speculation
A currency may be bought or sold for reasons other than trade. A speculator is a person or
organisation who seeks to profit from fluctuations in the Fx market by predicting whether
or not a currency will rise or fall in value. Sometimes this is a prediction that a currency
will be devalued.
Resources for Economics C Copeland