3. Foreign Exchange Market and Management of Foreign Exchange Risk
Foreign Exchange March 20
Transcript of Foreign Exchange March 20
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Customs Duties and Foreign Exchange
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Foreign Exchange
• If you travel to a different country, you need to purchase the local currency.• Same thing happens to people from other countries travelling to Canada, they need Canadian dollars.
• In Canada, you can buy and sell foreign currency at banks, credit unions and foreign exchange brokers.
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• Foreign exchange rates are stated with a buying rate and a selling rate.
Buying rate the rate at which the currency is bought from you
Selling rate the rate at which the currency is sold to you
Selling rate > Buying rate The difference is the amount the bank receives for making the
transaction.
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Examples
1. You want to buy 1500 Swiss francs. How much will it cost you to purchase this currency?
Method 1: Each Swiss franc costs $0.9666 Canadian dollars (selling rate)
1500 x 0.9666 = $1449.90
Method 2:Let x represent the amount of Canadian dollars needed to purchase Swiss francs.
1500 Swiss francs = x Canadian dollars
1 0.9666 1500 x
= 1x = (1500) (0.9666)x = $ 1449.90
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2. You have 15000 Finnish marks. How much will you receive in Canadian dollars for this amount?
Method 1:The buying price for one Finnish mark is 0.2131.
15000 x 0.2131 = $3196.50
Method 2:Let x represent the amount of Canadian dollars you receive.
15000 Finnish marks = x Canadian dollars
1 0.2131 15000 x
= 1x = (15000) (0.2131)x = $ 3196.50
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3. You buy 500 Pounds Starling.
500 x 2.4513 (selling rate) = $ 1225.65
You want to change 500 Pounds Sterling back to Canadian dollars (sell 500 Pounds Sterling).
500 x 2.2957 (buying rate) = $ 1147.85
The difference: $1225.65 - $1147.85 = $77.80
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Custom Duties NAFTA (North American Free Trade Agreement)
- Trade agreement to import goods "duty free" (no tax)- Canada, United States, Mexico
GP (General Preferential)- Special lower rates for custom duties- China, India, many Latin American countries
MFN (Most Favoured Nation)- most other countries
Custom duties are calculated in Canadian dollars
• Israel and Chile: no custom duties due to a special agreement.
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• Customs duties and excise taxes are calculated in Canadian dollars.
• Businesses and individuals that import items, must pay GST.
• When you purchase items from another country, you pay Customs duties and excise taxes (if any).
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Personal Exemptions:
- if you travel outside Canada, you are allowed to bring a certain value of goods into Canada, without having to pay the regular duties.
- personal exemptions depend on the length of time you have been outside Canada.
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Examples
1. The Cartier Jewellery Company imports 4000 francs worth of gold necklaces from France. How much will it cost them to bring the necklaces into Canada?
Step 1: Change 4000 francs to Canadian dollars4000 x 0.2384 (selling rate) = $ 953.60
Step 2: Custom duties (France is an MFN country)
$ 953.60 x 5.5% = $52.45
Step 3: Excise taxes$ 953.60 x 10% = $95.36
Step 4: GST7% x ($953.60 + $52.45 + $95.36) = 0.07 x 1101.41= $77.10
Step 5: Total cost$953.60 + $52.45 + $95.36 + $77.10 = $1178.51
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Step 1: Change to Canadian dollars1 watch = 6000 x 0.0398 (selling rate) = $238.8025 watches = 25 x $238.80 = $ 5970.00
Step 2: Custom duties (Belgium is an MFN country)
$ 5970.00 x 5% = $298.50
Step 3: Excise taxes1 watch = $238.80 - $50.00 = $188.80$188.80 x 10% = $18.88
Step 4: GST7% x ($5970.00 + $298.50 + $472.00) = 0.07 x $6740.50= $471.84
Step 5: Total cost
$5970.00 + $298.50 + $472.00 + $471.84 = $7217.34
2. The Klocke Factory brings 25 watches priced at 6000 francs each from Belgium. What will it cost to bring these watches to Canada?
25 watches = $18.88 x 25 = $472.00
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Assignment
Page: 15Assignment 1C
(due Tuesday)
Please, show your work!!!