1. Danielle Hultquist—from Sweden Bin Liu– from China March 11, 2009

2.  History about Currency  Basic Knowledge about Currency Exchange  Why Different Exchange Rates?  Historical Movements in Exchange Rates  Risks Related to Foreign Exchange  Arbitrage  Currency Exchange Investment

3.  5 tribes  5 basic goods-Fish, Bread, Pork, Egg, Firewood  5 different needs

4.  Barter – Trade without money ◦ Game  The Ancient Sumerians ◦ 3500 BC  First paper money ◦ 10 th century China

5.  What is foreign exchange rate?  Direct Quote vs. Indirect Quote  American Terms vs. European Terms  U.S. dollar as the base currency

6. (http://www.x-rates.com/)

7.  World Money System-historical  Purchasing Power Parity (PPP)

8.  School of Salamanca- 16 th century Spain ◦ Equivalent coins traded at different rates ◦ PPP  The Swedish Riksbank – 18 th century ◦ Daler bank notes  Gold Standard ◦ Currency convertible into pre-set, fixed quantities of gold

9. The Swedish Riksbank – 18 th century

10.  WWI & WWII ◦ Disorder in international finance  Bretton Woods ◦ July 1944 ◦ Agreement: Fixed exchange rates, quotation on gold or US dollars ◦ Breakdown  Floating exchange rates and imbalance

11. Historical Movements cont’d

12.  World Money System-historical  Purchasing Power Parity (PPP) The Law of One Price: the theory states that, in ideally efficient markets, identical goods should have only one price. Different Exchange Rate Appreciation & Depreciation Big Mac!

13. (http://www.economist.com/markets/indicators/displaystory.cfm?story_ id=13055650)

14.  Interest rate risk  Country risk  Exchange rate risk Adverse movements in exchange rates

15.  Triangular arbitrage  Cross-rate  An example: Condition: Starting: US$10,000 CD$1.24/US$1.00 AU$1.53/US$1.00 AU$1.23/CA1.00 CD$/US$*AU$/CD$≠AU$/US$  1.24*1.23=1.5252<1.5353 How to make money?

16. 1. Buy Australian dollars with US dollars: US$10,000*(AU$1.53/US$1)=AU$15,300 2. Buy Canadian dollars with Australian dollars: AU$15,300/(AU$1.23/CD$1)=CD$12,439 3. Buy US dollars with Canadian dollars: CD$12,439/(CD$1.24/US$1)=US$10,031

18.  Dealers --large international banks and other financial institutions  No organized exchange --linked  Brokers: facilitate most of the transactions  Necessary information: daily periodicals & services  In general: http://www.youtube.com/watch?v=CD52pBu93gY&feat ure=related http://www.youtube.com/watch?v=CD52pBu93gY&feat ure=related

19.  Why do we need currency?  How currencies are quoted?  Why are there different exchange rates?  Historical movements through time  What are the risks with currency exchange?  What’s arbitrage?  How to invest in currency?

22. Sincerely, Danielle Hultquist Bin Liu