Module#2 : Problems

Problem#2.1
• Chantal DuBois lives in Brussels. She can buy a U.S. dollar for
€0.7600.
• Christopher Keller, living in New York City, can buy a euro for
$1.3200.
• Is there any difference in the exchange rate between the
dollar and the euro, in two the cities?
 Gold Standard and Exchange Rate
Problem#2.3
• Before World War I, $20.67 was needed to buy one ounce of
gold.
• At the same time one ounce of gold could be purchased in
France for FF410.00,
• What was the implied exchange rate between French francs
and U.S. dollars? or
a. What is the implied exchange rate of French francs per US
dollar?
b. What is the implied exchange rate of US dollar per French
Francs?
Gold Standard and Exchange Rate
Problem#2.4
Under the gold standard, the price of an ounce of gold in U.S.
dollars was $20.67, while the price of that same ounce in
British pounds was £3.7683.
a. What would the exchange rate between the dollar and the
pound
b. What will be the implied exchange rate of U.S. dollar if the
price of one ounce of gold was $42.00 ?
Implied Exchange Rate
Problem#2.5
• If the price of a book on memoir of former Chairman of
the U.S. Federal Reserve Alan Greenspan entitled, "The Age
of Turbulence," is listed on Amazon.ca as C$26.33; and
• It costs US$23.10 on Amazon.com, in US
What exchange rate does that imply between the two
currencies?
Currency Appreciation and Profit Margins
Problem#2.6
• Ranbaxy, an India-based pharmaceutical firm, has continuing problems
with its cholesterol reduction product's price in one of its rapidly growing
markets, Brazil.
• All product is produced in India, with costs and pricing initially stated in
Indian rupees (INR), but converted to Brazilian reais (R$) for distribution
and sale in Brazil.
• In 2009, the unit volume was priced at INR 21,900, with a Brazilian reais
price set at R$895.
• But in 2010, the reais appreciated in value versus the rupee, averaging
INR26.15/R$.
a) What was the exchange rate between INR and R$(INR/R$) in 2009
b) In order to preserve the price of the product in reais, what should the
new rupee price be set at?
c) Has the Indian rupee appreciated or depreciated in value against the
Brazilian reais?
 Problem# 2.7
Impact of Currency Appreciation
on Pegged Rates
• The Hong Kong dollar has long been pegged to the U.S.
dollar at HK$7.80/$.
• The Chinese yuan was revalued in July 2005 against the
U.S. dollar from Yuan 8.28/$ to Yuan8.11/$,
a. How did the value of the Hong Kong dollar change
against the yuan? Has the Hong Kong dollar
appreciated or depreciated against Chinese Yuan.
b. What is the new exchange rate for Hong Kong Dollar
per Yuan.
 Problem Solving
#2.8, #2.9, #2.10
Percentage change in currency rates
Measuring % Change in Exchange Rates
Problem#2.8
• In December 1994, the government of Mexico officially
changed the value of the Mexican peso from 3.2 pesos per
dollar to 5.5 pesos per dollar.
a) What was the percentage change in its value?
b) Was this a depreciation, devaluation, appreciation, or
revaluation?
c) Explain.
Calculating new exchange rate given
%age change: Problem#2.9
• Many experts believe that the Chinese currency should
not only be revalued against the U.S. dollar as it was in
July 2005, but also be revalued by 20% or 30%.
• What would be the new exchange rate value if the Yuan
was revalued an additional a) 20% or b) 30% from its initial
post-revaluation rate of Yuan 8.11 per $?
• Assume USD as your domestic currency
Exchange Rate Change and impact on Price
Problem#2.10
• Toyota manufactures most of the vehicles it sells in the
United Kingdom, in Japan.
• The base platform for the Toyota Tundra truck line is
¥1,650,000.
• The spot rate of the Japanese yen against the British pound
has recently moved from ¥197/£ to ¥190/£.
• What is the percent change in the price of the Tundra to
Toyota's British subsidiary in British pounds?
Problems on impact of
currency changes and
differences

#2.11, #2.12, #2.13

Problem#2.11
• The Channel Tunnel or "Chunnel" passes underneath the English
Channel between Great Britain and France, a land-link between the
Continent and the British Isles.
• One side is therefore an economy of British pounds, the other euros.
If you were to check the Chunnel's rail ticket Internet rates you
would find that they would be denominated in U.S. dollars (USD).
• For example, a first class round trip fare for a single adult from
London to Paris via the Chunnel through RailEurope may cost
USD170.00.
• This currency neutrality, however, means that customers on both
ends of the Chunnel pay differing rates in their home currencies from
day to day. What is the British pound and euro denominated prices
for the USD170.00 round trip fare in local currency if purchased on
the following dates at the accompanying spot rates drawn from the
Financial Times?
Problem#2.11
Spot Rates Drawn from the Financial Times
British
  pound Euro
  Spot Rate Spot Rate
Date of Spot Rate (£/$) (€/$)
Monday 0.5702 0.8304
Tuesday 0.5712 0.8293
Wednesday 0.5756 0.8340

Cost of Return Ticket of RailEurope = USD170.00.

Cost of Return Ticket of RailEurope in £ and €
 Problem #2.12
• The Vietnamese dong, VND or d, is managed against the
U.S. dollar but is not widely traded.
• If you were a traveling coffee buyer for the wholesale
market (a "coyote" by industry terminology), which of the
following currency rates and exchange commission fees
would be in your best interest if traveling to Vietnam on a
buying trip?
Currency Exchange Rate d/$ Commission
1. Vietnamese bank rate d19,800 2.50%
2. Saigon Airport exchange d19,500 2.00%
bureau rate
3. Hotel exchange bureau rate d19,400 1.50%

Assume that you have an initial cash amount for exchange to dong
is $100.
Problem#2.13
Exchange Rates and cost of Imports
• Oriol Díez Miguel S.R.L., a manufacturer of heavy duty
machine tools near Barcelona, ships an order to a buyer in
Jordan.
• The purchase price is €425,000.
• Jordan imposes a 13% import duty on all products purchased
from the European Union.
• The Jordanian importer then re-exports the product to a
Saudi Arabian importer, but only after imposing their own
resale fee of 28%.
• Given the following spot exchange rates on April 11, 2010,
a) What is the total cost to the Saudi Arabian importer in
Saudi Arabian riyal, and
b) What is the U.S. dollar equivalent of that price?
Problem#2.13

Currency Cross rate Spot Rate

Jordanian dinar (JD) per euro (€) JD 0.96 per €
Jordanian dinar (JD) per U.S. dollar ($) JD 0.711 per $
Saudi Arabian riyal (SRI) per U.S. dollar ($) SRI 3.751 per $
Assumptions Value
Purchase price, in euros (€) 425000
Jordanian import duty on EU products 13%
Jordanian resale fees 28%