Danish Krone
Darcie Carr
Catherine Patterson
Joe Kennedy
Jeffrey Allinson
Daneland???
Understanding the Krone

Joined European Union in 1973


Denmark’s Nationalbank responsible
for monetary policy


Since rejected single European currency
twice
Danish Krone pegged to the Euro
Current DKK/USD exchange rate:

5.9088
Technical Analysis (30 Day)



Market Momentum
Moving Average
Bollinger Band
Market Momentum – 30 days
1
Y
E
A
R
6
M
O
N
T
H
3
M
O
N
T
H
1
M
O
N
T
H
Moving Average – 30 days
Bollinger Band – 30 days
Implications for U.S. Firm

Open Long Position:



Stay open  Benefit from exchange rate
OR purchase put option
Open Short Position:

Hedge


call option or forward contract
Currency Speculators:

Currency at a high  Short Sell

Good strategy for VERY short term traders
Non-Parity Models


Asset Choice Interest Rate Differential
Model
Balance of Payments Model
1/
2/
1/ 200
16 6
/
1/ 200
30 6
/
2/ 200
13 6
/
2/ 200
27 6
/
3/ 200
13 6
/
3/ 200
27 6
/
4/ 200
10 6
/2
00
6
Asset Choice Model
LIBOR RATES
4
3
2
1
0
EURO
KRONER
Asset Choice Model

Interest rates are dependent upon
those of the Euro

Gradually rates have increased over the
past year  increase desirability of
investment within Denmark
Asset Choice Model
LIBOR Interest Rates and DKK/USD Exchange Rate
7
6
5
4
DKK/USD
3
2
1
Ap
ril
M
ay
Ju
ne
Ju
A u ly
Se gu
pt st
em
b
O er
ct
No o be
ve r
De mb
ce e r
m
b
Ja e r
nu
Fe a ry
br
ua
ry
M
ar
ch
Ap
ril
0
LIBOR Interest rates
Implications for U.S. Firm
**Danish interest rates mirror Euro interest
rates**

Asset Choice:


Higher Interest Rates (Euro Rates
Increase) implies increase in demand
U.S. (4.75%) higher than Denmark 
U.S. has better returns for business

However, U.S. has higher implied corruption
risk (CPI)
Balance of Payments Model
Balance of Payments Model
8000
6000
4000
2000
Trade Balance (fob)
Current account
20
05
M
20 02
05
M
20 03
05
M
20 04
05
M
20 05
05
M
20 06
05
M
20 07
05
M
20 08
05
M
20 09
05
M
20 10
05
M
20 11
05
M
20 12
06
M
20 01
06
M
02
0
-2000
-4000
-6000
Balance of Payments
(DKK Millions)
December
January
February
Trade
Balance
818
-1408
2009
Current
Account
253
-4458
-1378
Balance of Payments


Over the last year a trade
balance surplus along with
a current account surplus
have placed upward
pressure on the currency
Recent publications of
cartoon jihad caused
boycott of Danish products
in Arab countries

However, clear rebound
on both sides in recent
months
Implications for U.S. Firm
**Danish interest rates mirror Euro interest
rates**

Balance of Payments:

Krone will strengthen over next few
months


Recovery from Jihad Scandal
Better to take long position
Parity Models


Relative Purchasing Power Parity
Model
International Fisher Effect
Relative PPP

Inflation rates



INFLATION
*5 year average
Current Spot rate: 5.9088
PPP= 5.9088[(1+.0198)^5
/ (1+.02552)^5]=
5.745842
‘01
‘02
‘03
‘04
‘05
US
2.83
1.59
2.27
2.68
3.39
*2.552
DKK
2.4
2.4
2.1
1.2
1.8
*1.98
Relative PPP 2005 Calculation



5.9088 [(1+.018)5 / (1+.0339)5] =
5.468214
Appreciation of 1.59%
Strengthening of currency
International Fisher Effect




5 yr bonds:
U.S. Treasury Yield 4.91 (April 2006)
Denmark Govt. bond = 3.59 (March
2006)
5.908 * (1+3.59%)5 = 5.545558
(1+4.91%)5
Implications for U.S. Firm

U.S. company with long position:

Keep open long position


U.S. company with open short position:


 benefit from long term Krone strengthening
Forward position to hedge against unfavorable
movements
Importers and Exporters (into Denmark):


Goods imported into Denmark will be cheaper
for the Danish and therefore demanded
Goods exported out of Denmark will be more
expensive for other countries
IMPORTANT

Denmark’s currency movement and
underlying monetary policy are heavily
influenced by the ECB. Thus, for
interest rate changes, inflationary
expectations, and results of such
changes, the ECB should be consulted
concurrently with Denmark’s
Nationalbank.
Questions?