Exchange%20Rate%20Basics:%20How%20currency%20exchange%20impacts%20prices

1
Exchange Rate BasicsHow currency exchange
impacts prices
2
Background

• Exchange rates are used to value one currency in
  relation to another currency. This module
  focuses on understanding the meaning of exchange
  rates and how changes in the rates impact prices
  in general.

3
Overview

• Currency exchange is traded on world financial
  markets similar to stocks and bonds. Trillions
  of dollars of currency changes hands every day on
  the currency markets.

4
Overview

• A number of websites show the values in the
  market, a few of which are shown here
• http//online.wsj.com/mdc/public/page/mdc_currenci
  es.html?modmdc_topnav_2_3000
• http//www.ft.com/markets/currencies
• http//moneycentral.msn.com/investor/market/Exchan
  geRates.aspx
• http//finance.yahoo.com/currency?u
• www.x-rates.com
• www.oanda.com
• www.exchange-rates.org

5
Overview

• International economics and various markets are
  highly sophisticated and no activity occurs in
  isolation.
• With this in mind, let us look at currency
  valuations as if the item could be isolated and
  independent from other elements in world
  economies.

6
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
7
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.
6007.02285.45
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
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.
6006.69389.65
9
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.
10
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??
30007.052425.41
11
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.
12
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 -0.0446.974-0.0063 -0.0063
100-.63
13
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.
14
(No Transcript)
15
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 7.0227.0326.693 104.53
6
Divide the total by of weeks 104.536156.969
16
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?
17
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!
18
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?
19
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!
20
Which currency?

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

It depends!!
21
Nominal values must be adjusted to real
converted values.
100 Canadian dollars would be worth 99.63
U.S. 1001.003799.63
500 Hong Kong dollars would be worth ______ U.S.
5007.807264.04
22
How does it all add up?

• Remember this is one small piece to the overall
  global trade puzzle.
• Other pieces include inflation, subsidization,
  tariffs, barriers, politics, supply and demand,
  type of advantage, etc.

23
Do prices change daily?

• No. The example shows a phone would cost more
  from one week to the next.
• Realistically - importers, retailers, brokers,
  etc. take exchange rate risks as part of their
  business environment.

24
Conclusion

• Foreign Currency Exchange is ONE factor that
  determines prices of goods you buy, the ability
  of U.S. manufacturers to export, and so forth.
• Next time you buy something made outside the
  United States youll no currency valuations
  impacted the cost!