InstructionsFor this assignment, you will practice calculating exchange rates and
examine some of the key factors that have an impact on foreign exchange.
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MBA 6601, International Business
Unit IV Assignment
Complete Part1 and Part 2 of this assignment, and submit as a single document for grading.
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.
Japanese yen
British pound
USD value for 1 unit of another currency
(as of 2/17/16)
Exchange amount

While you are visiting each of these countries, you have to buy supplies and equipment for your
operations. You want to determine what it is costing 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
British pound
Computer Ұ167,000.00
Desks & chairs €1,125.00
Printer £575.00
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?
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
Iceland krona ISK
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 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.
MBA 6601, International Business
Exchange Rate Examples
Rates table
USD value for 1 unit of another currency
(as of 3/15/16)
Japanese yen(¥)
Swiss franc(₣)
One-step examples
Example 1: Convert $3,000 to euros.
Divide the dollar amount by the given euro rate (1.124897).
$3,000 ÷ 1.124897 = €2,666.91
Example 2: Convert $3,000 to yen.
Divide the dollar amount by the given yen rate (.008847).
$3,000 ÷ .008847 = ¥339,098
Example 3: Convert ₣1,500 to U.S. dollars.
Multiply the Swiss franc amount by the given Swiss franc rate (1.030061).
₣1,500 * 1.030061 = $1,545.09
Example 4: Convert €16,000 to U.S. dollars.
Multiply the euro amount by the given euro rate (1.124897).
€16,000 * 1.124897 = $17,998.35
Multiple-step Examples
In some cases, it may take a few steps to calculate the currency since only the most frequently used rates
are provided by financial media. An example would be converting euros to yen. (You do not have to use
this method to complete your assignment if you are familiar with an alternative method.)
Example 5: Convert €3,000 to yen
Step 1: Convert euros to dollars, €3,000 * 1.124897 = $3,374.69
Step 2: Convert dollars to yen, $3,374.69 ÷ .008847 = ¥381,450.32
Example 6: Convert ¥50,000 to Swiss francs.
Step 1: Convert yen to dollars, ¥50,000 * .008847 = $442.35
Step 2: Convert dollars to Swiss francs, $442.35 ÷ 1.030061 = ₣429.44
USD value for 1 unit of another currency
Japanese yen(¥)
British pound (£)
Convert $8,000 into the following currencies:
1. Euros –
2. Yen –
3. Pounds –
Convert the following into U.S. dollars:
4. €1,000 –
5. ¥60,000 –
6. £400 –
Convert the following:
7. €2,000 to pounds
8. ¥70,000 to pounds
Note: Solutions are on the following page.
Financial Markets
Course Learning Outcomes for Unit IV
Upon completion of this unit, students should be able to:
7. Calculate the implications of foreign exchange rates.
Reading Assignment
In order to access the following resource(s), click the link(s) below:
Katz, D. (2016). Treasurers fret over currency risks. CFO, 32(1), 10–11. Reading from
Weller, M. (2015). The real forex problem. Modern Trader, 53. Retrieved from
Unit Lesson
Global Foreign Exchange (FOREX) Markets
Virtually every nation in the world has currency. The United States has its dollar, South Africa has its rand,
Russia has its ruble, and Vietnam has its dong. Foreign exchange is both a noun and a verb. As a verb,
foreign exchange means to exchange one currency for another. As a noun, foreign exchange is money held
in an account denominated in the currency of another nation. Usually, central banks and multinational
companies have funds designated as foreign exchange. The global market in which such transactions take
place is the foreign exchange market.
An exchange rate is the price of a currency designated in the number of units of one currency that buys one
unit of another currency. Let’s take a look at a true story about John that shows how the exchange rate differs
over time from one currency to another. In the summer of 2015, during a trip to China, John decided to
purchase $1,000 worth of Chinese currency, the yuan. It was a spur of the moment decision, and John was
treating it like an adventure. After all, back in the United States, John could always go to an airport currency
dealer and get his money back if he needed the dollars. John walked into the Chinese bank across from his
hotel and for $1,000 U.S. purchased 6,299 yuan plus a few coins. The bank charged a 1% transaction fee,
which means that John exchanged $990, and received 6,299 yuan. Based on that transaction, the exchange
rate calculates at approximately 6.3626 yuan per dollar. John still has the 6,299 yuan, and the exchange rate
seven months later is 6.5012 yuan per dollar. His investment is now valued at $969. Here is a breakdown of
the investment.
MBA 6601, International Business
John walks into Chinese
bank to buy yuan
Bank charges 1%
transaction fee
Remainder goes to
purchase yuan
7 months later
Approximate value of
John’s yuan
$1 = Ұ6.3626
$1 = Ұ6.5012
Let’s consider why foreign exchange is so important to international trade. Say that a produce broker in
Iceland wants to buy bananas from Costa Rica. There is not a direct foreign exchange market for Iceland’s
krona and the Costa Rican colon. However, there is an exchange market for the colon to the U.S. dollar and
the U.S. dollar to the krona. Two transactions later and the produce broker has the right kind of currency to
buy the bananas. An interesting side note is the U.S. dollar remains the dominant vehicle currency in foreign
exchange transactions; it was on one side of 87% of all trades as of 2013 (Bank for International Settlements,
2013). Because the U.S. dollar is in so many transactions like this, banks keep a large reserve of dollars,
hence the moniker, the world’s reserve currency.
According to the Bank for International Settlements, foreign exchange markets averaged $5.3 trillion per day
in 2013, growing 8% per annum for the previous six years. FX swaps and spot trading accounted for 80% of
the activity (2013, p. 3). Besides the U.S. dollar, the Euro and the Japanese Yen were the most used
FOREX Instruments
FOREX has two purposes. One purpose is to carry on international trade; to arrange payment for products in
other countries. The second purpose is as an investment; to take advantage of a country’s currency as it gets
stronger or weaker due to internal and external political policies. The instruments listed here are essentially
contracts to deliver units of currency under different conditions.
FX swap: This is when one currency is traded for another currency on one date and traded back later.
According to the Bank for International Settlements, FX swaps account for 42% of FOREX trading (2013,
p. 8).
Spot transactions: These transactions involve the exchange of a specific amount of currency for a specific
exchange rate on a current date such as today or tomorrow. Spot trading accounts for approximately 38% of
FOREX trading (Bank for International Settlements, 2013, p. 8).
Forward transactions: These transactions involve the exchange of a specific amount of currency for a
specific exchange rate for a date in the future. Forward transactions account for approximately 13% of
FOREX trading (Bank for International Settlements, 2013, p. 8). These transactions are hedging strategies for
when the buyer is forecasting that one currency will weaken in relation to another currency. Hedging
strategies are discussed in more detail later in this lesson.
Currency swaps: This usually refers to assets, such as bonds, based in foreign currencies. The value of a
bond in a foreign currency depends on (1) the interest rate it offers and (2) the expected change in the
currency’s exchange rate against other currencies. Currency swaps, options, and other products make up the
rest of the FOREX trading (Bank for International Settlements, 2013).
Who Buys Foreign Exchange?
There are a variety of buyers and sellers in the foreign exchange market. Each participant has different
needs, which makes for a diverse market. The major participants are commercial banks, corporations that
engage in international trade, nonbank financial institutions (e.g., insurance companies), and central banks.
MBA 6601, International Business
Individuals, such as our friend John, may also participate, but such cash transactions
are an insignificant
fraction of the total foreign exchange market.
Factors That Affect Exchange Rates
Exchange rates play an important part in a country’s level of trade. The more trade a country can achieve, the
greater the GDP, the higher the standard of living, and the more influence it has over neighboring countries. A
currency with a higher exchange rate is a strong currency. A stronger currency makes a country’s exports
more expensive and imports less expensive. The current account balance, which is a net of exports minus
imports, goes down with a strong currency. Consequently, for purposes of trade, it is sometimes helpful to
have a weak currency. Several variables affect the strength of the currency.
Inflation: A country with stable prices will have a stronger currency than a country with higher inflation.
Inflation indicates currency debasement is occurring by money printing (Daniels, Radebaugh, & Sullivan,
Interest rates: Increasing interest rates is one way to reduce inflation. Increasing interest rates reduces the
demand for currency since borrowing money costs more. As borrowing costs go up, demand for money goes
down. The reduced amount of currency reduces the demand for products, which reduces inflation. Increasing
interest rates increases the strength of the currency (Daniels et al., 2015).
Current account balance: As stated earlier, the net between exports and imports is the current account.
Imports are products coming into the country, paid for by money going out of the country. Exports are just the
opposite, and trading partners send money to pay for the products that we send them. A current account
deficit suggests that more money is going out of the country than is coming in. This is in line with a country
living beyond its means. A country with a current account surplus will likely have a stronger currency (Daniels
et al., 2015).
Public debt: Deficit financing is one way for a country to finance large-scale infrastructure projects. While
these projects stimulate the domestic economy, foreign investors remain cautious about investing where
public debt is high. The main reason is that high public debt encourages a government to print money, which
results in inflation. As stated earlier, inflation indicates currency debasement. Low public debt encourages a
stronger currency (Daniels et al., 2015).
Economic performance and political stability: Foreign investors prefer countries with economic
performance and political stability. This indicates that the economy is functioning with acceptable inflation,
interest rates, current account balance, and public debt. This suggests low political risk. Countries with low
political risk will usually have a strong currency (Daniels et al., 2015).
Exchange-Rate Agreements
The IMF (International Monetary Fund) recognizes three types of exchange rates.
Hard Peg: Fifteen percent of the countries in the world lock their currency into a direct relationship with
another currency and hold it steady (International Monetary Fund, 2014). Examples abound in which small
countries that trade a lot with a nearby large country set the exchange rate so that it does not vary. Take El
Salvador for example, it has no currency of its own but uses the U.S. dollar exclusively as its currency. In
Europe, a few European countries use the euro as their one and only currency. Some countries do have their
own currency but maintain the same ratio with the other country’s currency despite its strengthening or
Soft Peg: Forty-six percent of the countries in the world have adopted the policy of pegging their currency to
another country’s currency or a basket of currencies. However, they usually allow the exchange rate to vary
plus or minus a few percent (International Monetary Fund, 2014). The Chinese yuan fits into this category as
it is pegged to the U.S. dollar with approximately a 2% variation.
Floating Arrangement: Approximately 39% of the countries in the world allow their currencies to float
(International Monetary Fund, 2014). In other words, their currency has no ties to another nation’s currency.
The currencies in this category generally change according to the factors identified earlier in this lesson, but
MBA 6601, International Business
sometimes the currencies are subject to market manipulation. A country’s central
can buy
up excess
currency with foreign exchange funds, making the currency stronger on a temporary
Title basis.
Hedging Strategies
Hedging strategies are simply financial plans to avoid unwanted exchange-rate fluctuations and to take
advantage of forecasted exchange-rate trends. It is important for companies that deal in international trade to
understand how to forecast the strength or weakness of a particular currency. In general, the best predictors
of future exchange rates are interest rates for the short-term, inflation for the medium-term, and current
account balances for the long-term. Hedging strategies can affect business operations positively by
forecasting exchange-rate directions.
Marketing decisions: As one country’s currency weakens, and another country’s currency strengthens, the
products in one country become cheaper while the products in the other country become expensive. Tourism
is one great example of how this works. As the U.S. dollar gets stronger, and the euro becomes weaker, trips
to Europe become much more affordable. This works because the euro and the U.S. dollar are free floating. If
a currency were pegged to the other, the currencies would stay relatively the same to each other.
Production decisions: Companies with multiple factories around the globe will route production to those
countries with a weak currency. Shortly after NAFTA became law in January of 1994, the Mexican peso was
devalued. This devaluation encouraged American companies to move much of their high-cost North American
production facilities to Mexico.
Financial decisions: Exchange rates affect the cost of remitting funds over national borders, sourcing
financial resources, and reporting financial results. Where possible, companies use strong currencies to
purchase weak currencies to pay bills and borrow money. Weak currencies come from countries with the
lowest interest rates, thus borrowing money there is usually more cost effective. For reporting purposes, sales
growth in international markets is enhanced when the weak currency is strengthening in relation to the home
Global Capital Markets
Raising capital to fund a company’s operations is always critical. Raising capital in equities and debt in the
international market is competitive to the cost of raising capital in the U.S. market. This happens in several
Eurocurrency: This is also known as an offshore currency and is any currency banked outside its country of
origin. For example, the Eurodollar is a certificate of deposit in U.S. dollars in a bank outside the United
States. This market usually settles the need for short-term or medium-term debt. Eurocurrencies are usually
debt instruments ranging from one year to less than five-year terms. The major sources of Eurocurrencies are
foreign governments, multinational corporations, and European banks. The attraction to this source of money
is that interest rates are usually lower than domestic interest rates (Daniels et al., 2015).
International bonds: These are long-term sources of funds. Foreign bonds are sold to buyers in a foreign
country, but their value is denominated in the currency of the country of issue. For example, a bank in China
may sell a foreign bond to someone in New York, but the value of the bond and the monthly payment would
be in yuan. A Eurobond or offshore bond has characteristics similar to the Eurocurrency. A bank in China
could sell a bond to someone else in New York, but the value of the bond and the monthly payment would be
in U.S. dollars. The advantage of this market is that either type of bond is less expensive than domestic
markets and the investors are worldwide (Daniels et al., 2015).
Equity capital: The sale of stock is another way to achieve capital. Private placements or initial public
offerings can happen internationally—just as they can domestically. One source of big money is the sovereign
wealth funds that are state-owned investment funds from various nations. Throughout the world, there are 60
stock market exchanges with over 17 in each Europe and Asia (Desjardins, 2016). Equity capital for qualified
companies is available and cheaper in offshore locations.
MBA 6601, International Business
Taxation of Foreign-Source Income
As complex as domestic taxation seems, it is child’s play when compared to international taxation. Taxation
affects the operating decisions of the multinational corporation. It goes without saying that tax planning
influences profitability and cash flow. Taxation has a strong impact on several choices:

location of operations;
choice of operating form, such as export or import, licensing agreement, or foreign direct investment;
legal form, such as branch or subsidiary;
amount of debt versus equity; and
method of setting transfer prices.
There are many reasons why companies set up operations abroad: to be closer to customers or to get
access to raw materials or even technology. Nevertheless, another reason is to escape the high corporate
taxes in the U.S. and other high-tax countries. Recent corporate tax rates in the United States are in the
30% plus marginal tax rate. Compare that to 12.5% marginal tax rate in Ireland, and you will understand
why a multitude of multin …
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