Useful Financial Website u u Currency converter u FX History u FX Trading Simulation

Guess Shifts Apparel-Making to Mexico From Los Angeles... [Wall Street Journal, January 14, ????] u “Jeans maker Guess, Inc., dogged by allegations of illegal labor practices, is quietly moving most of its U. S. manufacturing to Mexico and other countries south of the border.”

Guess Shifts Apparel-Making to Mexico From Los Angeles... [Wall Street Journal, January 14, 1997] u “Jeans maker Guess, Inc., dogged by allegations of illegal labor practices, is quietly moving most of its U. S. manufacturing to Mexico and other countries south of the border.”

Guess Shifts Apparel-Making to Mexico From Los Angeles... [Wall Street Journal, January 14, 1997] u “… the percentage of Guess garments sewn in Los Angeles will drop to 35% next month from 75% five months ago. Mr. Marciano said the shift was mainly a ‘commercial decision’ to ‘stay competitive’ and ‘lower costs.’

Guess Shifts Apparel-Making to Mexico From Los Angeles... [Wall Street Journal, January 14, 1997] u “Mr. Marciano said Guess saves $1.50 to $2 a garment by sending cut fabric to five sewing factories in Mexico as well as plants in Peru and Chile. He declined for competitive reasons to discuss the total production cost of a garment.

Guess Shifts Apparel-Making to Mexico From Los Angeles... [Wall Street Journal, January 14, 1997] u “Unite estimates that less than $5 of the cost of a $48 pair of jeans goes for fabric and labor. Guess said its manufacturing shift affects ‘several million units a year’ with a wholesale value of $300 million to $325 million.”

The Determination of Exchange Rates [Shapiro - Chapter 2]

Problems – Chapter 2 u u 2.2 u u 2.3 u u 2.5

Foreign Exchange Rates u u Exchange Rate: “number of units of one currency that can be purchased for one unit of another currency”

Exchange Rate u u “… market-clearing prices that equilibrate supplies and demands in foreign exchange markets.”

Exchange Rate Terminology u u Revaluation - increase in stated par value of a pegged currency u u Devaluation - decrease in stated par value of a pegged currency

Exchange Rate Terminology u u Depreciation - loss in value of a floating currency u u Appreciation - gain in value of a floating currency

Exchange Rate Terminology u u Spot Rate - price of foreign exchange with same day payment u u Forward Rate - rate quoted today for delivery at a fixed future date (30, 90, 180 days)

Fluctuating Value of the Yen [¥ per $, ]

Foreign Exchange Example [“Let’s do lunch!”] u u $1 = Lit (Jan., 1994) u u Lit / = $30.65 u u $1 = Lit (June 1994) u u Lit / = $32.19 u u $1.54 / $30.65 = +5%

Exchange Rate Impact

Taxes account for about two-thirds of the price of gas in Europe, compared with about 20 percent of the price in the United States.

World Economic Forum, Most Competitive Economies

u 6. Sweden u 7. Hong Kong u 8. Netherlands u 9. Japan u 10. United Kingdom

World Economic Forum, Most Competitive Economies u 1. Switzerland u 2. Singapore u 3. Finland u 4. Germany u 5. United States u 6. Sweden u 7. Hong Kong u 8. Netherlands u 9. Japan u 10. United Kingdom

Changing Exchange Rates u u Foreign currency appreciation (depreciation) is computed as the fractional increase or decrease in the dollar value of a foreign currency.

“Two-Percent Bag” u u Important topics u u Essential Calculations u u Potential Exam Questions

Changing Exchange Rates [Appreciation of the Pound]

Changing Exchange Rates [Depreciation of the Dollar]

Collapse and Recovery of the S. Korean Won, !

Exchange Rate Impact

Currency Boards u u No central bank; no discretionary monetary policy u u Currency is convertible at a fixed rate into a foreign reserve currency, frequently the U. S. $ u u Board holds foreign securities as reserves; 100%+

Dollarization u u Replacement of the local currency with the U. S. dollar u u Panama (1904); Ecuador (2000) u u Expectation of price stability u u Sacrifice of national identity and pride

Determining Exchange Rates u u Economic Factors u u Political Factors u u Social Factors

Economic Factors u u Relative rate of inflation u u Interest rate differentials u u Economic growth u u Central bank behavior

Political Factors u u Government stability u u Government spending u u Taxation

Social Factors u u Population growth u u Cultural values – –Health care – –Education – –Retirement

Social Factors u u “According to the latest Istat statistics, the median age of marriage in Italy was 32 years for men and 30 years for women. In recent years, the average age has increased by 4 years for men and 6 years for women.” La Republicca, Summer, 2006

Problems – Chapter 2 u u 2.2 u u 2.3 u u 2.5

Shapiro: Problem 2.2.a u u 2002: US$ 1 = ¥ 125 u u 2006: US$ 1 = ¥ 115 u u a. Dollar value of ¥ 1 in 2002; 2006? u u 2002: US$ 1 ÷ ¥ 125 = $0.008 u u 2006: US$ 1 ÷ ¥ 115 = $0.0087

Shapiro: Problem 2.2.b u u b. % change in $ value of the ¥ between 2002 and 2006? u u (e 1 – e 0 ) ÷ e 0 u u (.0087 –.008) ÷.008 = +8.75%

Shapiro: Problem 2.2.c u u c. % change in Yen value of the US$ between 2002 and 2006? u u (1/e 1 – 1/e 0 ) ÷ 1/e 0 u u (1/.0087 – 1/.008) ÷ 1/.008 = u u (115 – 125) ÷ 125 = -8.0%

Shapiro: Problem 2.3 u u February 1: € = $ u u May 1: € = $ u u Has the Euro (€) appreciated or depreciated against the dollar? u u By what percentage has the Euro appreciated or depreciated?

Shapiro: Problem 2.3 u u Appreciation (€): (e 1 – e 0 ) / e 0 = ? u u ( – ) / = +5.15% u u Depreciation ($): (e 0 – e 1 ) / e 1 = ? u u (1/ – 1/1.2966) / 1/ = -4.9%

Shapiro: Problem 2.5 u u 3/29/07: Rupee(Rs) = $ u u 3/30/07: Rupee(Rs) = $ u u Depreciation of the Rupee? u u ( – ) / = -1.25%

Shapiro: Problem 2.5 u u 3/29/07: Rupee(Rs) = $ u u 3/30/07: Rupee(Rs) = $ u u Appreciation of the Dollar? u u (1/ – 1/ ) / 1/ = %