International Business Chapter 11 International Business START EXIT

Chapter Outline 11.1 Currency Conversion Chapter Summary Chapter Exercises

11.1 Currency Conversion It’s a well-worn cliché to say that the world is getting smaller and business is becoming more global all the time and it’s true. There are plenty of products at your local shopping mall or even the grocery store that come from all sorts of exotic locations. Just as much of the world’s business is conducted in English, much of the world’s business is conducted in U.S. dollars. Most countries, though, have currencies of their own or participate with others in a shared currency such as the euro. To convert between currencies, we must know the exchange rate.

11.1 Currency Conversion Example 11.1.1 Problem Convert US $3,724.59 into euros using the rate of 0.7838 (see page 470 of your textbook). Solution US$1 = €0.7838 US$1 x 3,724.59 = €0.7838 x 3,724.59 $3,724.59 = €2,919.33

11.1 Currency Conversion Example 11.1.2 Problem Convert 348 Turkish new lira into US$ using the rate of 0.6692. Solution L1 = US$0.6692 L1 x 348 = US$0.6692 x 348 L348 = US$232.88

11.1 Currency Conversion Forward rates present an opportunity to lock in an exchange rate today for a currency exchange that will take place in the future. Businesses and financial institutions sometimes try to protect themselves from sudden changes in the exchange rates by making an agreement with another business or financial institution to exchange currencies at a future date at a rate agreed on today.

11.1 Currency Conversion Example 11.1.4 Problem In August 2006, Rylad Drugs, an American company, sold a large order of pharmaceuticals to a Japanese wholesaler. The price was set at ¥13,500,000, and it was agreed that payment would be made when the order was delivered in mid-November. At the current exchange rate, Rylad is comfortable with the price, but it is worried that changes in the yen-dollar exchange rate over the next 3 months might make this deal less attractive. Rather than run the risk of being hurt by changes in the exchange rate, suppose that on Thursday, August 24, 2006, the company made a deal to convert this sum into U.S. dollars 3 months later, on November 24, 2006. When the exchange was made, how much did they receive in dollars?

11.1 Currency Conversion Example 11.1.4 Cont. Solution Using the 3-month forward rate gives: ¥1 = $0.008691 ¥13,500,000 = US$117,328.50

11.1 Currency Conversion Example 11.1.5 Problem Convert C$8,000 Canadian dollars into Mexican pesos (see Table 11.2, p. 474, in your textbook). Solution C$1 = Mex$9.83930 C$8,000 = Mex$78,714

11.1 Currency Conversion Example 11.1.6 Problem Convert 40,000 Russian rubles into Thai baht. Solution R1 = US$0.03731 R40,000 = US$1,492.40 $1 = B37.693 $1,492.40 = B56,253 R40,000 = B56,253

TRANSNATIONAL NATIONAL CURRENCY EXCHANGE 11.1 Currency Conversion TRANSNATIONAL NATIONAL CURRENCY EXCHANGE RETAIL RATES AS OF 8/25/06 Country/Currency Sell Buy Euro 1.2954 1.2575 Japan/yen 0.008645 0.008414 Canada/dollar 0.9250 0.8650 Mexico/peso 0.0917 0.0912 South Korea/won 0.001105 0.001025 Switzerland/franc 0.8255 0.7945 UK/pound 1.9221 1.8567

11.1 Currency Conversion Example 11.1.7 Problem Solution €1 = $1.2954 Suppose you want to exchange $200 for euros. Calculate the amount you would receive in euros from the retail table given on a previous slide. Solution €1 = $1.2954 €1/1.2954 = $1.2954/1.2954 €0.771962328 = $1 €0.771962328 x 200 = $1 x 200 €154.39 = $200

Chapter 11 Summary Converting from US$ into a Foreign Currency Converting from a Foreign Currency into US$ Converting between Two Foreign Currencies Conversion Using Retail Rates

Chapter 11 Exercises Problem 1: Converting from U.S. to Foreign Currency Problem 2: Converting from Foreign Currency to U.S. Problem 3: Converting Between Two Foreign Currencies Problem 4: Retail Foreign Currency Transactions EXIT

Problem 1 Convert US $500 into euros if the exchange rate is US$1 = €0.8115. CHECK YOUR ANSWER

Solution 1 Convert US $500 into euros if the exchange rate is US$1 = €0.8115. US$1 x 500 = €0.8115 x 500 US$500 = €405.75 BACK TO GAME BOARD

Problem 2 Convert 500 Jordanian dinars into US dollars if the exchange rate is 1 JOD = US$1.4114. CHECK YOUR ANSWER

Solution 2 Convert 500 Jordanian dinars into US dollars if the exchange rate is 1 JOD = US$1.4114. 1 JOD x 500 = US$1.4114 x 500 500 JOD = US$705.70 BACK TO GAME BOARD

Problem 3 Convert 300 euro into Japanese yen using Table 11.2 on page 474. CHECK YOUR ANSWER

Solution 3 Convert 300 euro into Japanese yen using Table 11.2 on page 474. 1€ = 0.00673¥ 300€ = 300 x 0.00673¥ 300€ = 2,019¥ BACK TO GAME BOARD

Problem 4 Suppose you want to exchange $100 for Mexican pesos. How much would you receive in pesos? Use the retail table on Slide 11. CHECK YOUR ANSWER

Solution 4 Suppose you want to exchange $100 for Mexican pesos. How much would you receive in pesos? Use the retail table on Slide 11. 1 MXN = $0.0917 1 MXN/0.0917 = $0.0917/0.0917 $1 = 10.905 MXN $100 = 1,090.51 MXN BACK TO GAME BOARD