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?