Danielle Hultquist—from Sweden
Bin Liu– from China
March 11, 2009

History about Currency

Basic Knowledge about Currency Exchange

Why Different Exchange Rates?

Historical Movements in Exchange Rates

Risks Related to Foreign Exchange

Arbitrage

Currency Exchange Investment



5 tribes
5 basic goods-Fish, Bread, Pork, Egg,
Firewood
5 different needs

Barter – Trade without money
◦ Game

The Ancient Sumerians
◦ 3500 BC

First paper money
◦ 10th century China
 What
is foreign exchange rate?
 Direct Quote vs. Indirect
Quote
 American Terms vs. European
Terms
 U.S. dollar as the base
currency
(http://www.x-rates.com/)
 World
Money System-historical
 Purchasing
Power Parity (PPP)

School of Salamanca- 16th century Spain
◦ Equivalent coins traded at different rates
◦ PPP

The Swedish Riksbank – 18th century
◦

Daler bank notes
Gold Standard
◦ Currency convertible into pre-set, fixed
quantities of gold
The Swedish Riksbank – 18th century

WWI & WWII
◦ Disorder in international finance

Bretton Woods
◦ July 1944
◦ Agreement: Fixed exchange rates, quotation on
gold or US dollars
◦ Breakdown

Floating exchange rates and imbalance
Historical Movements cont’d
World Money System-historical
 Purchasing Power Parity (PPP)
The Law of One Price: the theory states that, in
ideally efficient markets, identical goods should
have only one price.

Big Mac!
Different Exchange Rate
Appreciation &
Depreciation
(http://www.economist.com/markets/indicators/displaystory.cfm?story_
id=13055650)
 Interest
rate risk
 Country
risk
 Exchange rate risk
Adverse movements in exchange rates

Triangular arbitrage

Cross-rate

An example:
Condition: Starting: US$10,000
CD$1.24/US$1.00
AU$1.53/US$1.00
AU$1.23/CA1.00
CD$/US$*AU$/CD$≠AU$/US$1.24*1.23=1.5252<1.5353
How to make money?
1.
Buy Australian dollars with US dollars:
US$10,000*(AU$1.53/US$1)=AU$15,300
2. Buy Canadian dollars with Australian dollars:
AU$15,300/(AU$1.23/CD$1)=CD$12,439
3.
Buy US dollars with Canadian dollars:
CD$12,439/(CD$1.24/US$1)=US$10,031

Dealers
--large international banks and other financial institutions

No organized exchange

Brokers: facilitate most of the transactions

Necessary information: daily periodicals & services

--linked
In general:
http://www.youtube.com/watch?v=CD52pBu93gY&feat
ure=related

Why do we need currency?

How currencies are quoted?

Why are there different exchange rates?

Historical movements through time

What are the risks with currency exchange?

What’s arbitrage?

How to invest in currency?
Sincerely,
Danielle Hultquist
Bin Liu