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Exchange Rate Basics: How currency exchange impacts prices 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. Overview

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Presentation Transcript
background
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.
overview
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.

overview4
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_currencies.html?mod=mdc_topnav_2_3000

http://www.ft.com/markets/currencies

http://moneycentral.msn.com/investor/market/ExchangeRates.aspx

http://finance.yahoo.com/currency?u

www.x-rates.com

www.oanda.com

www.exchange-rates.org

overview5
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.

slide6

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

slide7

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

slide8

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

slide9

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.

slide10

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

slide11

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.

slide12

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%

slide13

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.

slide15

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

which currency
Which currency?
  • It depends!!

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

slide21

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 to the overall global trade puzzle.

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

do prices change daily
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.

conclusion
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 – you’ll no currency valuations impacted the cost!