math in the news: issue 86

Math in the NewsIssue 86

The Rise of the Chinese Yuan

The Rise of the Yuan

The Chinese Yuan is becoming a more prominent currency internationally. Watch the following video to learn more.

http://youtu.be/bBSEvRNaA8c

The Rise of the Yuan

The Yuan is far from overtaking the role of the dollar in international markets, but it is now in the top 10 foreign currencies in use.

Note: These percentages are greater than 100% because two currencies are

involved in each transaction.

What is Currency Exchange?

Currency Exchange

If you’ve ever traveled to another country, you’ve had to deal with foreign exchange.

Let’s look at an example.

Currency Exchange

Suppose you’re traveling from Laredo, Texas, to Nuevo Laredo, Mexico. You find some souvenirs that cost 100 pesos. How much is that in dollars?

This is where exchange rate comes in.

Currency Exchange

Currency exchange rate tables are used to determine the value of something in another currency. Exchange rates vary from day to day, as you can see here for the exchange rate between US dollars and Mexican pesos.

Currency Exchange

Set up a proportion to solve.

Currency Exchange

Because the exchange rate varies, the price of 100 pesos in dollars varies.

$7.62

$7.79

Currency Exchange

On the business side, these types of transactions happen much more frequently.

Let’s look at an example.

Currency Exchange

Starbucks purchases coffee beans from international suppliers. For example, when Starbucks purchases a supply of beans from Colombia, it needs to pay for that in Colombians pesos.

Currency Exchange

Since it purchases a huge volume of Colombian coffee, to save money, Starbucks can purchase Colombian pesos when the exchange rate is favorable and use them later to purchase coffee beans.

Currency Exchange

Some commodities are priced in US dollars. For example, OPEC oil is priced in dollars. This simplifies the purchase of oil, since currency exchange fluctuations aren’t a factor.

What is the Foreign Exchange Market?

Foreign Exchange Market

Whenever one currency is exchanged for another, a bank or currency trader is involved. There is a small fee for the exchange, and this is how banks make money from foreign exchange.

Foreign Exchange Market

The Foreign Exchange Market (Forex) tracks the exchange rates for all currencies around the world. The exchange rates vary daily. The Forex deals with buying and selling currency.

Foreign Exchange Market

Some banks will purchase different currencies and keep them in reserve. As you saw from the Starbucks example, keeping a reserve of certain currencies avoids the daily fluctuations in currency pricing.

Foreign Exchange Market

The dollar remains the world’s largest reserve currency. This is an indication of the dominance of the US economy.

Foreign Exchange Market

In recent years the Chinese Yuan has become a growing reserve currency. More and more companies are paying in this currency or are asking to be paid in it. This is an indication of the growing influence of the Chinese economy.