danielle hultquist—from sweden bin liu– from china march 11, 2009

Danielle Hultquist—from Sweden

Bin Liu– from China March 11, 2009

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

5 tribes

5 basic goods-Fish, Bread, Pork, Egg, Firewood

5 different needs

Barter – Trade without money◦ Game

The Ancient Sumerians ◦ 3500 BC

First paper money◦ 10th century China

What is foreign exchange rate?

Direct Quote vs. Indirect Quote

American Terms vs. European Terms

U.S. dollar as the base currency

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

World Money System-historical

Purchasing Power Parity (PPP)

School of Salamanca- 16th century Spain◦ Equivalent coins traded at different rates ◦ PPP

The Swedish Riksbank – 18th century◦ Daler bank notes

Gold Standard◦ Currency convertible into pre-set, fixed

quantities of gold

The Swedish Riksbank – 18th century

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

Historical Movements cont’d

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!

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

Interest rate risk

Country risk

Exchange rate riskAdverse movements in exchange rates

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?

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

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&feature=related

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?

Sincerely,Danielle HultquistBin Liu