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