CHAP 2 – THE International Monetary System - problems PDF

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CHAP 2 – THE INTERNATIONAL MONETARY SYSTEM

1. In Amsterdam, buying a US dollar = €0.8200/$. In New York, buying a euro = USD1.22. What is the foreign exchange between the dollar and the euro? 

In Amsterdam: 1USD = €0.8200 ?USD = 1€

 The foreign exchange between the dollar and the euro is: 1 $∗1 € =$ 1.295 ≈ $ 1.22 € 0.8200 

In New York, the foreign exchange between the dollar and the euro: 1€ = $1.22 ?€ = 1USD

 The foreign exchange between the dollar and the euro is: 1 €∗1 $ =€ 0.819 ≈ € 0.82 $ 1.22

2. In 1994, Mexico officially changed the value of the Mexican peso form Peso3.2/USD to Peso5.5/USD. Was this a devaluation, revaluation, depreciation or appreciation? Explain. Percentage change∈ peso value=

beginning rate – ending rate ∗100 endingrate ¿

Peso 3.2/ USD −Peso 5.5/ USD ∗100 Peso 5.5/USD

¿−41.82 ≈−42 %  When government officially changes the value of its currency, it means that this relates to revaluation or devaluate. In this case, this is a devaluation because percentage change in peso value is the negative. In other words, it takes more pesos per US dollar; its value is less or devalued.

3. Under the gold standard, the price of an ounce is USD20.67/ounce, and £4.2474/ounce. What would the exchange rate between the dollar and the pound be if the U.S. dollar price had been USD38.00 per ounce? 

When USD20.67/ounce and £4.2474/ounce, the exchange rate between the US dollar and the pound is: the exchangerate the dollar /the pound=

20.67 =$ 4.8665/£ 4.2474



If the U.S. dollar price had been USD38.00 per ounce, the exchange rate between the US dollar and the pound would be: the exchangerate the dollar /the pound=

38.00 =$ 8.9466 /£ 4.2474

4. Before World War I, USD20.67/ounce of gold, and in France, F310.00/ounce, what was the exchange rate between French francs and U.S. dollars? 

The exchange rate between the US dollar and French francs would be: the exchangerate USD /FF=

20.67 =$ 0.06668/ F 310.00

Or 

The exchange rate between French francs & the US dollar would be: the exchangerate FF/USD=

310.00 =F 14.998/$ 20.67

5. The spot rate for Mexican pesos is Ps10.80/USD. If your company buys Ps180000 spot from your bank on Monday, how much must your company pay and when? 

If the company buy Ps180000 spot on Monday, it must pay: The paid amount ∈USD=



180000 the amount of spot = =US $ 16666.67 the spot exchangerate 10.80

On Wednesday – two business days, spot transactions are settled.

6. The exchange rate HKD/USD is HKD7.80/USD. When the Chinese yuan was revalued in July 2005 against the U.S. dollar from Yuan8.28/USD to Yuan8.11/USD, how did the value of the Hong Kong dollar change against the yuan?



When Yuan8.28/USD, the exchange rate HKD/Yuan is: the exchangerate HKD/Yuan=



When Yuan8.11/USD, the exchange rate HKD/Yuan is: the exchangerate HKD/Yuan=



7.80 =HKD 0.942/Yuan 8.28

7.80 =HKD 0.962/Yuan 8.11

The percentage change in HKD value is: Percentage change∈HKD value=

beginning rate – ending rate ∗100 ending rate ¿

0.942−0,962 ∗100=−2.079 % 0.962

 The value of the Hong Kong dollar against the yuan has fallen (–2.079%) since the Chinese yuan was revalued in July 2015 against the US dollar.

7. 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/£. How does this change the price of the Tundra to Toyota's British subsidiary in British pounds? 

The percentage change in Yen value is: Percentage change∈ peso value=

beginning rate – ending rate ∗100 endingrate ¿



197 −190 ∗100=3.68 % 190

If the spot rate of the Japanese yen against the British pound was ¥197/£, the price of the Tundra to Toyota's British subsidiary in British pounds is : The price∈pounds=



Price of Tundra∈Yen 1650000 = =£ 8375.63 the spot exchange rate 197

If the spot rate of the Japanese yen against the British pound was ¥190/£, the price of the Tundra to Toyota's British subsidiary in British pounds is : The price∈pounds=



Price of Tundra∈Yen 1650000 = =£ 8684.21 the spot exchange rate 190

The percentage change in Tundra’s price in British pounds is: Percentage change∈ price=

new price – old price old price ¿

8684.21−8375.63 ∗100=3.68 % 8375.63

 The percentage change in Tundra’s price in British pounds is similar the percentage change in Yen value against the British pound although the spot rate of the Japanese yen against the British pound has recently moved from ¥197/£ to ¥190/£. The reason is that the price of the truck did not change.

8. All product is produced in India, with costs and pricing initially stated in Indian rupees (Rps), but converted to Brazilian reais (RUSD) for distribution and sale in Brazil. In 2004, the unit volume was priced at Rps12500, with a Brazilian reais price set at RUSD825. But in 2005 the reais appreciated in value versus the rupee, averaging Rps17.5/RUSD. In order to preserve the reais price and product profit margin in rupees, what should the new rupee price be set at?



In 2004, the unit volume was priced at Rps12500, with a Brazilian reais price set at R$825. Thus, the initial spot rate is: theinitial spot rate=



12500 =Rps 15.15 825

In 2005, the reais appreciated in value versus the rupee, averaging Rps17.5/R$. In order to preserve the reais price and product profit margin in rupees, the new rupee price should be set at: the new rupee price=17.5∗825 =Rps 14025

 The new rupee price should be set at Rps14025 because the Indian rupee depreciated in value against the Brazilian reais, the implied Indian rupee price is actually HIGHER than it was the previous year. This means that Ranbaxy would keep the same Brazilian reais price and either enjoy a much larger profit margin in Indian rupees, or potentially keep the Indian rupee price the same as the previous year and actually reduce the Brazilian reais price.

9. The Channel Tunnel or "Chunnel" passes underneath the English Channel between Great Britain and France. One side is therefore an economy of British pounds, the other euros. The Chunnel's rail ricket Internet rates 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 Rail Europe 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? Date 17 July 2005 18 July 2005 19 July 2005

Pound Spot Rate £0.5702/USD £0.5712/USD £0.5756/USD

Euro Spot Rate €0.8304/USD €0.8293/USD €0.8340/USD



We have:  Train fare = US$170.00 and  Customers on both ends of the Chunnel pay differing rates in their home currencies from day to day.  Thus, if purchased at the accompanying spot rates drawn from the Financial Times, customers have to pay their train fare in local currency is: The trip fare ∈local currency=spot rate∗train fare

 On 17 July 2005,  The trip fare in pound is: The trip fare ∈ pound=spot rate∗trainfare ¿ £ 0.5702/USD∗US $ 170.00

¿ £ 96.934 The trip fare in euro is: The trip fare ∈euro=spot rate∗trainfare ¿ € 0.8304/USD∗US $ 170.00 ¿ € 141.168  On 18 July 2005,  The trip fare in pound is: The trip fare ∈pound=spot rate∗trainfare ¿ £ 0.5712/USD∗US $ 170.00 ¿ £ 97.104  The trip fare in euro is: The trip fare ∈euro=spot rate∗trainfare ¿ € 0.8293/USD∗US $ 170.00 ¿ € 140.981  On 19 July 2005,  The trip fare in pound is: The trip fare ∈pound=spot rate∗trainfare ¿ £ 0.5756/USD∗US $ 170.00 ¿ £ 97.852  The trip fare in euro is: The trip fare ∈euro=spot rate∗trainfare ¿ € 0.8340/USD∗US $ 170.00 ¿ € 141.78 

10. A European-based manufacturer ships a machine tool to a buyer in Jordan. The purchase price is €375,000. Jordan imposes a 12% 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 22%. Given the following spot exchange rates on May 24, 2004, what is the total cost to the Saudi Arabian importer in Saudi Arabian riyal, and what is the U.S. dollar equivalent of that price? Spot rate, Jordanian dinar (JD) per euro (€) Spot rate, Jordanian dinar (JD) per dollar US dollar Spot rate, Saudi Arabian riyal (SRI) per US dollar 

JD0.8700/€ JD0.7080/USD SRI3.750/USD

We have: Spot rate JD/ SRI=

Spot rate JD/USD 0.7080 = =0.1888 Spot rate SRI /USD 3.750

 Spot rate JD/SRI = JD0.1888/SRI 

The ship’s price = €375000



The ship’s price in JD is: The ship ’ s price∈JD=Spot rate JD/€∗ship ’s price ∈ € ¿ 0.8700∗375000=326,250

 The ship’s price in JD is JD326,250



Jordan imposes a 12% import duty on all products purchased from the European Union. Thus, the importing fee and the total ship’s price are: The importing fee=The ship ’ s price∈JD∗12% ¿ 326,250∗12 %=JD 39,150

The totalcost of ship=The ship ’ s price ∈JD+the importing fee ¿ 326,250 + 39,150=JD 365,400



The Jordanian importer then re-exports the product to a Saudi Arabian importer, but only after imposing their own resale fee of 22%. Thus, the resale fee and the resale ships’ price are: The resale fee=The total cost of ship∗22% ¿ 365,400∗22 %=JD 80,388

The resale price of ship=The total cost of ship+ theresale fee ¿ 365,400 + 80,388=JD 445,788



The total cost to the Saudi Arabian importer in Saudi Arabian riyal is: The totalcost of ship∈SRI=

the resale price of ship spot rate JD /SRI ¿

445,788 =2,361,165.254 0.1888

 The total cost to the Saudi Arabian importer in Saudi Arabian riyal is SRI2,361,165.254 

The U.S. dollar equivalent of that price is: The totalcost of ship∈US dollar=

the total cost of ship∈SRI spot rate SRI /USD ¿

2,361,165.254 =US $ 629,644.068 3.750

 The US dollar equivalent of that price is US$629,644.068 11. 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 20% or 30% from its initial postrevaluation rate of Yuan 8.11/USD?



To calculate the new exchange rate value, the formula is:

Percentage changes=

Initial exchangerate value – new exchange rate value ∗10 0 new exchangerate value

Or New exchange rate value=



Initial exchange rate value (1+ percentage changes )

If the yuan was revaluated an additional 20%, the new exchange rate value is:

Initial exchange rate value New exchange rate value= (1+ percentage change ) ¿

8.11 8.11 = 1.2 =6.75 8 (1+20 %)

 Hence, new exchange rate value is Yuan6.238/USD



If the yuan was revaluated an additional 30%, the new exchange rate value is: New exchange rate value=

Initial exchange rate value (1+ percentage change ) ¿

8.11 8.11 =6.23 8 = (1+30 %) 1.3

 Hence, new exchange rate value is Yuan6.238/USD

12. Many people were surprised when Vietnam became the second largest coffee producing country in the world in recent years, second only to Brazil. The Vietnamese dong, VND or d, is managed against the U.S. dollar but is not widely traded. If you were a travelling 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 Vietnamese bank rate (dong/USD) Saigon Airport Exchange Bureau rate (dong/USD) Hotel Exchange Bureau rate (dong/USD)

rate d14000 d13800 d13750

commission 1.50% 2.00% 1.50%

 At Vietnam bank: 

The exchange commission fee is: Commision fee=14000∗1.50 %=VND 21 0/USD



The total currency exchange is: The totalcurrency exchange=the exchange rate−the exchange commision fee

¿ 14000−210 =VND 13790 /USD  The currency rates and exchange commission fee at Vietnam bank is VND13790/USD  At Saigon Airport Exchange Bureau: 

The exchange commission fee is: Commision fee=1 38 00∗2.00 %=VND 276/USD

 The total currency exchange is: The totalcurrency exchange=the exchange rate−the exchange commision fee ¿ 13800−276 =VND 13524 /USD

 The currency rates and exchange commission fee at Saigon Airport Exchange Bureau is VND13524/USD

 At Hotel Exchange Bureau: 

The exchange commission fee is: Commision fee=13 75 0∗2.00 %=VND 27 5/USD  The total currency exchange is: The totalcurrency exchange=the exchange rate−the exchange commision fee

¿ 13 750 −27 5 =VND 13 475 /USD  The currency rates and exchange commission fee at Hotel Exchange Bureau is VND13475/USD  Therefore, at Vietnam bank, the combined exchange rate and commission fee is highest value (VND13790/USD, the exchange commission fee has the lowest value (VND210/USD), as compared with the Saigon Airport Exchange Bureau rate and Hotel Exchange Bureau rate. Thus, Vietnamese bank rate is the best interest (VND13790/USD). Besides, the combined rate of Hotel Exchange Bureau is more preferable than the Saigon Airport Exchange Bureau rate. The reason is that the Hotel’s commission fee is lower than Saigon Airport’s commission fee, although the exchange rate of Hotel Exchange Bureau is little bit lower than Saigon Airport....