Currency Exchange Rate
Part 1
Your company is deciding to expand to the following countries, and you and two other managers will have to visit these countries to set up operations. You have $1,500.00 to convert in each currency. Compute the exchange amount for each, and complete the table.
| Country/Currency | USD value for 1 unit of another currency (as of 2/17/16) | Exchange amount |
| Japanese yen | $0.008754 | Ұ 171,350.34 |
| Euro | $1.1159 | € 1,344.21 |
| British pound | $1.4398 | £ £ 1,041.91 |
While you are visiting each of these countries, you have to buy supplies and equipment for your operations. You want to determine what it costs you in U.S. dollars. Utilizing the same exchange rates given above, compute the costs into U.S. dollars, and complete the table:
| Japanese yen | Computer Ұ167,000.00 | $ 1,461.82 |
| Euro | Desks & chairs €1,125.00 | $ 1,255.39 |
| British pound | Printer £575.00 | $ 827.98 |
Solution:
An exchange rate is referred to as the value of a country’s legal tender versus the legal tender of a different state or commercial region. In this case, there are three types of currencies they include Japanese Yen, the Euro, and the British pound. The significant amount being converted is $1,500.
The exchange amount.
Japanese Yen: $1,500:0.008754 =Ұ 171,350.34
Euro: $1,500:1.1159 = €1,344.21
British Pound: $1500*1.4398 = 1041.81
The costs in the US
Computers: Ұ 167,000:$0.008754 = $1,461.92
Desks & chairs: €1,125.00:$1.1159 = $1,255.39
Printer: £575.00:$1.4398 = $827.39
Part 2
Pedro in Costa Rica wants to purchase some wild Atlantic salmon from Hans in Iceland. The fish are purchased in Iceland’s currency, the krona. Pedro’s brother works in a bank and will take care of the transactions free of charge. Pedro has 1,000,000 colons to start with. (There is no transaction fee, and shipping is not calculated at this point.)
How much krona does he have to work with?
Answer:
The first step is converting the 1,000,000 Costa Rican colon to acquire Us Dollars.
Method: 1,000,000: $0.001909
= USD 1,909
The second step is conversion of 1.909 US dollars to Iceland Krona: $1,909*0.00788
=ISK 242,258.89
After conversion, Pedro has 242,258.89
| Country/Currency | USD $ value for 1 unit of another currency (as of 2/17/16) | Euro € value for 1 unit of another currency (as of 2/18) |
| Costa Rica colon CRC | $0.001909 | €0.001745 |
| Iceland krona ISK | $0.00788 | €0.007062 |
The next day Hans decides to purchase some bananas from his new trading partner in Costa Rica. Han’s sister works for an import/export agency and can arrange the transaction in euros with no fee. Hans takes all of the krona he received from Pedro and proceeds to convert his currency to the colon. (Note, one country’s currency experienced some weakness overnight.
How much colon does he have to work with? List your steps and the results you achieved with each step. Also, explain some factors that could cause the country’s currency to weaken.
Answer:
Hans earns ISK 242,258.88 from the sale of Salmon.
The second part: Converting the Iceland Krona to Euros.
ISK 242,258.88*0.007062
=€1,710.83221
Third Step: Converting to Costa Rican Colon
€1,710.83* 0.001745= CRC 980,419.60
Factors that lead to the weakening of a Country’s currency
Rate of inflation
According to Lustig Roussanov and Verdelhan (2011), variations in market inflation results in alterations in currency exchange rates. A nation with a lesser rate of inflation than another’s will see an appreciation in the currency value. When inflation is low, the costs of goods and services increases at a slower rate. A nation with a constantly low rate of inflation displays an increasing value of currency. In contrast, a nation with greater inflation characteristically sees devaluation in its legal tender and is frequently supplemented by greater interest rates.
Tariff Rate
This is known as the tax imposed on imported products. The main aim of using tariffs is the restriction of trade, as the price on imported products and services is increased, making it unaffordable for the consumers (Lustig Roussanov & Verdelhan, 2011). Tariffs are a source of revenue for governments as well as domestic production companies at the expense of both clients and the external companies.
Political Stability and Performance
A state’s radical stability and performance may result in the weakening of a country’s currency. A nation that is likely to exhibit a lesser risk of political turmoil is guaranteed more investment opportunities, consequently drawing away investment opportunities from other nations that experience political turmoil. An increase in foreign investment, in turn, results in an appreciation of the domestic currency’s value (Lustig Roussanov & Verdelhan, 2011). A nation with a comprehensive monetary and trade strategy does not provide any room for improbability in the value of its legal tender.
Government Debt
Government debts are considered as a public or national debt owed by the central administration. Governments with high debts are less likely to obtain foreign investments, therefore resulting in inflation. External financiers may opt to trade their bonds in the open market if the market foresees administration debts in a particular republic. Consequently, a diminution in the significance of its exchange rate will ensue.
The economic situation in the country.
The economic situation of a nation is considered the current state of affairs in regards to the economy. The state of the economy is known to change over time while considering the financial and business sequences, as the economy undergoes development and reduction (Lustig Roussanov & Verdelhan, 2011). The state of the economy is believed to be affirmative during the expansion of the economy and is viewed to be undesirable when an economy is astringent. Recession may dwindle the legal tender of a country.
References
Lustig, H., Roussanov, N., & Verdelhan, A. (2011). Common risk factors in currency markets. The Review of Financial Studies, 24(11), 3731-3777.
