CURRENCY SYSTEMS

OBJECTIVES

Describe the concept of money from various perspectives

Explain the concepts of exchange rate and purchasing power

Explain how fluctuating exchange rates impact businesses and individuals

KEY VOCABULARYAppreciation

Arbitrage

Depreciation

Exchange rate risk

Fixed exchange rates

Floating exchange rates

Foreign Exchange

Foreign Exchange hedging

Foreign exchange option

Forward contract

Ratio

WHAT IS MONEY?

Imagine that you are each selling an important item on Craigslist for $100

You get two interested buyers

• One wants to pay them $100 in US currency• The other buyer offers to pay 100 Euros

• How many take the US dollars?• How many take the Euros?

WHAT IS MONEY?

Money is a commodity or asset that can be legally exchanged for something of equivalent value, such as goods or services. Its characteristics are that it is durable, portable, divisible, scarce, and generally accepted.

• Based on this definition, what can be used as money?• Create a list of 5-10 items

COMPANY RECOMMENDATION MEMO

This assignment measures the impact of the foreign exchange markets on a business by showing how fluctuations in currency values can either reward or punish a well-thought-out business

Download: Memo- New Markets for Mercury Shoes

• Take the role of high-level managers at an athletic shoe company who are being asked by the CEO to write a brief report recommending where to manufacture and sell shoes, based on a variety of criteria, but especially on currency exchange rates

CURRENCY EXCHANGE AND SHOPPING TOURISM

In the mid-2000s, as the dollar lost value compared to other currencies such as the euro and the yen (Japan’s currency), tourists from those areas began coming to the United States to shop because it was suddenly more affordable for them, and they could purchase products for a relatively lower price than in their own countries

CURRENCY EXCHANGE AND SHOPPING TOURISM

With a lower dollar compared to the euro, does it become cheaper or more expensive for Americans to visit Europe? Why?

Given your answer, do you think tourism to Europe would increase or decrease during that period?

Does the lower dollar mean that US companies are likely to export more or fewer goods to Europe?

CURRENCY EXCHANGE AND SHOPPING TOURISM

Currency exchange rates have complex impacts on businesses, benefiting some and harming others, even within the same country

CURRENCY EXCHANGE MARKETS

Presentation 1

CURRENCY EXCHANGE SIMULATION

Download: Worksheet- Currency Exchange

• Half of the questions are related to currency transactions by consumers and the other half to businesses’ transactions

Why are currency exchange rates determined and posted every day?

• The relative value of currencies fluctuates constantly, and since trillions of dollars’ worth of currencies change hands daily, it is important to know the exact values of those currencies

CURRENCY FLUCTUATION AND PURCHASING POWER

Presentation 2

THE BIG MAC INDEX

The assigned reading clarifies, and gives concrete examples of, purchasing power parity (PPP)

It also further defines the earlier referenced concepts of under- and overvalued currency and a strong and weak dollar, describing how these impact individuals and businesses

THE BIG MAC INDEX

Economists are always looking for effective ways of measuring the relative values of one currency against others

The Economist magazine has come up with a fun but serious way of comparing the PPP of different currencies by using the price in local currency of a consumer item that is the same nearly everywhere it is sold: a McDonald’s Big Mac.

THE BIG MAC INDEX

Download: Reading- The Big Mac Index

• Answer the questions before the reading

Work in pairs to answer the questions at the end of the reading

THE BIG MAC INDEX

You should have an understanding of how the Big Mac Index estimates purchasing power, as well as some of the reasons it can be an inaccurate measure of a currency’s value.

• These include:• Government subsidization of goods• Different tastes of consumers• Different sourcing of the components of a Big Mac• Different price trends in different sectors of a country’s

economy.• For example, in one country, housing may be

exceptionally expensive relative to the price of food; and since housing is a big cost for most people, the Big Mac index would overstate the purchasing power of that country’s currency

COMPANY RECOMMENDATION

Download: Writing Frame- Recommendations for Mercury Shoes

• Ask for feedback using the Memo: New Markets for Mercury Shoes as a guide

INCORPORATING RECOMMENDATIONS INTO THE WRITING

Create a final draft of your recommendations on a new sheet of paper, keeping the same outline as the writing frame, and incorporating any necessary changes

WHY DO CURRENCY VALUES MATTER?

What are some types of businesses that might benefit from a relatively weak national currency compared to those of other countries?

What are some types of businesses that might benefit from a strong currency?

• “Weak” currency is one that doesn’t buy very much outside its home country and a “strong” currency is one that buys a lot outside its home country

WHY DO CURRENCY VALUES MATTER?

Relatively weak national currencies tend to be good for businesses that export goods, sell discounted or bargain products, and provide goods and services for international visitors. Stronger currencies benefit businesses that import goods and sell high-end or luxury products.

ENRICHMENT

Research Project: Research and write a report on the linkage between the cost of crude oil (petroleum), from which gasoline is made, and the exchange rate of the dollar

All oil is priced in US dollars, even though less than 12% of global production comes from the United States

This link between oil and the dollar has been a contentious issue for both consumers and producers

Some oil producers have threatened to start pricing the oil they sell in other currencies (the euro, for example), but so far that has not yet happened on any significant scale.

ENRICHMENTResearch and write a report on the possibility of the euro eclipsing the use of the dollar as the global benchmark currency

Go through a brief history of what is known as the Bretton Woods system or fixed exchange-rate system and its eventual breakdown

Discuss the growing role of other currencies including the euro, and the Renminbi (RMB) used in China

• Long-term trends since the 1990s have led some to question whether the US dollar will retain its role as the preeminent global currency in the long run, but that today the US dollar remains the currency most widely used in world trade, and most widely held in other countries’ national foreign-currency reserves.

CROSS-CURRICULAR INTEGRATIONPolitical Science: Follow the international news section of any national newspaper for a period of two weeks, looking for a major negative event about a single country that gives two or more days of sequential coverage. Once a major negative event occurs, look up copies of the Wall Street Journal that fall the three days prior to the event and the three days following

Go to the Finance section of the paper and look up the exchange rates for the country’s currency relative to the dollar. Graph the exchange rate over that six-day period and then write a report that describes the news event covered and the impact on the currency value. (Examples include Indonesia and the 2004 tsunami; England and the 2004 subway bombing; or South Africa and the 1994 election of Nelson Mandela as President).