Exchange Rate Basics:Exchange Rate Basics:How currency exchange How currency exchange

impacts pricesimpacts prices

BackgroundBackground Exchange rates are used to value one currency in relation to another Exchange rates are used to value one currency in relation to another

currency. This module focuses on understanding the meaning of currency. This module focuses on understanding the meaning of exchange rates and how changes in the rates impact prices in exchange rates and how changes in the rates impact prices in general.general.

OverviewOverview

Currency exchange is traded on world Currency exchange is traded on world financial markets – similar to stocks financial markets – similar to stocks

and bonds. Trillions of dollars of and bonds. Trillions of dollars of currency changes hands every day currency changes hands every day

on the currency markets. on the currency markets.

OverviewOverview

A number of websites show the values A number of websites show the values in the market, a few of which are in the market, a few of which are

shown here:shown here: http://online.wsj.com/mdc/public/page/mdc_currencies.html?http://online.wsj.com/mdc/public/page/mdc_currencies.html?

mod=mdc_topnav_2_3000mod=mdc_topnav_2_3000 http://www.ft.com/markets/currencieshttp://www.ft.com/markets/currencies http://moneycentral.msn.com/investor/market/http://moneycentral.msn.com/investor/market/

ExchangeRates.aspxExchangeRates.aspx http://finance.yahoo.com/currency?uhttp://finance.yahoo.com/currency?u www.x-rates.comwww.x-rates.com www.oanda.comwww.oanda.com www.exchange-rates.orgwww.exchange-rates.org

OverviewOverview

International economics and various International economics and various markets are highly sophisticated and markets are highly sophisticated and

no activity occurs in isolation. no activity occurs in isolation.

With this in mind, let us look at With this in mind, let us look at currency valuations as if the item currency valuations as if the item could be isolated and independent could be isolated and independent

from other elements in world from other elements in world economies.economies.

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

In week 1, it tool 7.022 Kronas to buy 1 U.S. dollar.

In week 15, it tool 6.693 Kronas to buy 1 U.S. dollar.

Looking at the difference between week 1 and week 15, we can see that the value of the U.S. dollar relative to the Sweden Krona has _________.

In week 1, it tool 7.022 Kronas to buy 1 U.S. dollar.

In week 15, it tool 6.693 Kronas to buy 1 U.S. dollar.

Looking at the difference between week 1 and week 15, we can see that the value of the U.S. dollar relative to the Sweden Krona has declined

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

With a declining U.S. dollar…

Everything else being the same, consumers in the United States would likely pay more for products from Sweden.

Example: If a cell phone importer was paying 600 Krona per phone imported, in week one, it would cost $______to import.

600÷7.022=85.45

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

With a declining U.S. dollar…

Everything else being the same, consumers in the United States would likely pay more for products from Sweden.

Example: If a cell phone importer was paying 600 Krona per phone imported, in week 15, it would cost $________ to import.

600÷6.693=89.65

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

Week 1 = $85.45

Week 15 = $89.65

Which week would U.S. consumers buy more???

Week 1!

Therefore, all else being equal, U.S. consumers benefit from a stronger dollar when buying imports.

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

If it is week six and one U.S. dollar equals 7.052 Krona, how many U.S. dollars could you receive if you had 3,000 Krona??

3000÷7.052=$425.41

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

If one U.S. dollar was worth 6.974 Krona in week 9 and 7.018 Krona in week 11, has the value of the U.S. dollar increased or decreased?

The value of the dollar has INCREASED.

One can now buy MORE Krona with EACH U.S. dollar.

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

Determine the percentage change in the value of the Krona in per U.S. dollar from week 9 to week 11.

6.974-7.018=-0.044

-0.044÷6.974=-0.0063

-0.0063×100=-.63%

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

We can graph the exchange rate over time by placing the Krona per U.S. dollar on the vertical axis and the weeks on the horizontal axis.

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

What is the average value of Krona per U.S. dollar over the entire 15 weeks?

Add all weekly values:7.022+7.032+…6.693=

104.536

Divide the total by # of weeks:

104.536÷15=6.969

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

When would it be best to import goods from Sweden?

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

When would it be best to import goods from Sweden?

Week 8!

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

When would it be best to export goods to Sweden?

Sweden Krona and U.S.

Dollar

Krona Krona

Week In U.S. $ Per U.S. $

1 0.1424 7.022

2 0.1422 7.032

3 0.142 7.042

4 0.1431 6.988

5 0.1429 6.998

6 0.1418 7.052

7 0.1414 7.072

8 0.141 7.092

9 0.1434 6.974

10 0.1432 6.983

11 0.1425 7.018

12 0.1441 6.940

13 0.1456 6.868

14 0.1479 6.761

15 0.1494 6.693

When would it be best to export goods to Sweden?

Week 15!

Which currency?Which currency?

Would you rather have 100 Canadian Would you rather have 100 Canadian Dollars or 500 Hong Kong Dollars? Dollars or 500 Hong Kong Dollars?

It depends!!

Nominal values must be adjusted to “real” converted values.

100 Canadian dollars would be worth $99.63 U.S.100÷1.0037=99.63

500 Hong Kong dollars would be worth $______ U.S.

500÷7.8072=64.04

How does it all add up?How does it all add up?

Remember – this is one small piece Remember – this is one small piece to the overall global trade puzzle.to the overall global trade puzzle.

Other pieces include inflation, Other pieces include inflation, subsidization, tariffs, barriers, subsidization, tariffs, barriers, politics, supply and demand, type of politics, supply and demand, type of advantage, etc.advantage, etc.

Do prices change daily?Do prices change daily?

No. The example shows a phone No. The example shows a phone would cost more from one week to would cost more from one week to the next.the next.

Realistically - importers, retailers, Realistically - importers, retailers, brokers, etc. take exchange rate brokers, etc. take exchange rate risks as part of their business risks as part of their business environment. environment.

ConclusionConclusion

Foreign Currency Exchange is ONE Foreign Currency Exchange is ONE factor that determines prices of factor that determines prices of goods you buy, the ability of U.S. goods you buy, the ability of U.S. manufacturers to export, and so manufacturers to export, and so forth.forth.

Next time you buy something made Next time you buy something made outside the United States – you’ll no outside the United States – you’ll no currency valuations impacted the currency valuations impacted the cost!cost!