Tài chính doanh nghiệp - Finance 407: Multinational financial management - Topic 3: Retail foreign exchange transactions: bid - Ask, cross rates, credit and debit transactions

Topic #3: Retail Foreign Exchange Transactions: Bid-Ask, Cross Rates, Credit and Debit TransactionsL. GattisThe Pennsylvania State UniversityFinance 407: Multinational Financial Management1Learning Objectives2Students can convert currencies usingbid-ask quotationscross rate calculationsStudents can calculate the total cost of using cash, credit or debit in forex transactionsReview3Suppose the USDCAD is C$1.2/US$. How many USD can you buy for C$100?$83.33$120Review4Suppose the kroner exchange rate changes from Kr4/$ to Kr4.5/$. What is the appreciation of the kroner?-12.5%-11.11% +11.11%+12.5%Bid – Ask Exchange Rates5Travelex or American Express currency offices at the airport use one exchange rate for buying and one for selling. Listed below are the Travelex USD rates for 8/10/2010British PoundTravelex: $1.43 – $1.85Danish KronerTravelex : Kr4.92 – Kr6.30Customer buys pounds (selling dollars) at this priceCustomer buys dollars (selling kroner) at this priceBid-Ask Quotations6How many Kroner can you buy for $100?Since you are buying Kroner and Selling Dollar – Use USD Bid$100 x “USD Bid” (Kr4.92/$) = Kr492Alternative rule: Customer always loses – gets less, pays more $100 x “Lowest Rate” (Kr4.92/$) = Kr492 Bid Kr 4.92/$ – Ask Kr 6.30/ $Price to Sell $ / Buy KrPrice Buy $ / Sell KrBid (Low) Price of $Ask (High) Price of $Bid-Ask Quotations7How many kroner will it cost to buy $100?Since you are buying USD and Selling kroner – Use USD ask$100 x “USD ask” (Kr6.30/$) = Kr630Alternative rule: Customer always loses – gets less, pays more $100 x “Highest Rate” (Kr6.30/$) = Kr630 Bid Kr 4.92/$ – Ask Kr 6.30/ $Price to Sell $ / Buy KrPrice Buy $ / Sell KrBid (Low) Price of $Ask (High) Price of $Bid-Ask and Direct-Indirect Conversions81/Indirect Bid = Direct Ask1/Indirect Ask = Direct Bid Bid Kr 4.92 – Ask Kr 6.30 / $Bid $ 1/6.3 – Ask $ 1/4.92 / KrBid $ .1587 – Ask $ .2033 / KrPrice to Sell $, Buy KrPrice to Sell Kr, Buy $Price to Sell Kr, Buy $Price to Sell $, Buy KrBid-Ask Quotations9How many USD will it cost to buy Kr100?Since you are buying Kr and Selling USD – Use USD BidKr100 x “USD ask” (1 / Kr4.92/$) = $20.33Alternative rule: Customer always loses – gets less, pays more Kr100 x “Highest $/Kr = 1/Lowest Kr/$” (1 / Kr4.92/$) = $20.33 Bid Kr 4.92/$ – Ask Kr 6.30/ $Price to Sell $ / Buy KrPrice Buy $ / Sell KrBid (Low) Price of $Ask (High) Price of $Poll10Suppose USDMXN quote is P12/$ Bid- P13/$ Ask. How many USD would it cost to buy 1,000 pesos?$76.92$83.33$12,000$13,000Cross Rates11 8/10/2010 Travelex$1.43 – $1.85 / £Kr 4.92 – Kr 6.30 / $Poll12How many kroner would you receive if you sold ₤300?25.7442.6487.192,110.683,496.50 Travelex Rates$1.43 – $1.85 / £Kr 4.92 – Kr 6.30 / $Alternatives to Airport Currency Kiosks – Debit Cards13Use your debit card (or credit card) at a foreign ATM to withdrawal foreign currencies (cards must have the Visa or MasterCard logo)Rates are close to interbank market rates (plus 1-5% markup)Typically 1% Visa fee and 0%-3% issuing bank feeThese “fees” do not show up on your statement – “built into” exchange rateYour issuing bank may charge you a fee per withdrawal of $3-$7The foreign bank that owns the ATM will also charge you another fee of $5-$10Total Cost: Market Rate x (1+markup) + Your Bank ATM Fee + Foreign ATM FeeAlternatives to Airport Currency Kiosks – Debit Cards14Total Cost: Market Rate x (1+markup) + Your Bank ATM Fee + Foreign ATM FeeProblem: You withdrawal £150 using an ATM card on your first day in London. The market exchange rate is $1.57/£. The ATM exchange rate markup is 3%, your bank fee is $7.00 and the ATM fee is £5 (also charged at interbank rate plus mark-up). How many dollars will be debited from your account? What is the “effective” $/£ exchange rate (incl. fees)? What is the effective rate if you were only withdrawing £25? Alternatives to Airport Currency Kiosks – Credit Cards15Use your credit card to make purchasesMany foreign businesses require a 4-6 digit PIN to use a credit card. Be sure to call you bank 2 weeks before you leave to get the PIN (mailed) and tell them you are leaving the countryLike debit cards, rates are better (market rate plus 1-5% markup)Some foreign businesses charge a fee of 2-3% if you use a credit card in “swipe and sign mode” instead of “PIN” modeUsing your credit card to withdrawal cash at a ATM also includes immediate financing charge (1-2% per month) + “cash advance” fee. Total Cost: Market Rate x (1+foreign business fee%) x (1+markup%) x (1+financing rate) if not paid by the end of the month or cash withdrawal Alternatives to Airport Currency Kiosks – Credit Cards16Total Cost: Market Rate x (1+foreign business fee%) x (1+markup%) x (1+financing rate) if not paid by the end of the month or cash withdrawalProblem: You use your credit card to charge a £150 item. The exchange rate markup is 2.5% (market rate is $1.57) and the foreign business charges a 3% credit card fee on the cost of the item. You do not payoff your credit card for one month and pay 24% APR in financing. What was the total USD cost and effective exchange rate? Poll17On your arrival to London you need £8 for a 24-hour, 6-zone pass on the Underground (a.k.a., the Tube). You may use Travelex cash, credit, or an ATM withdrawal. Which is cheapest (in USD)?Which is the cheapest transaction method? TravelexATMCreditMarket/TravelexMkt $ 1.57 / £Trx: $1.43–$1.85/£ATM Withdrawal2.5% Rate Markup$3 Bank Fee₤2 ATM Fee Credit Purchase5% Rate Markup18% APR (1 Mo)No Merchant feeOther Travel Forex Suggestions18Call your bank two weeks before you go abroad and tell them where you are going and ask them to mail you a PIN codeEmail yourself images of the front and back of your cards (as well as your passport) to help in case of loss or theftAvoid allowing the foreign business to charge you in USD. The rate is likely much worse than your banks and you may still get charged all the bank fees.Avoid airport money exchange company “ATMs” and find a bank ATMYour card may not work for all merchants (some only accept the new Chip+PIN technology vs. Swipe+Sign used in the U.S.). I suggest one ATM card and two credit cards with PINs.Get online access to your bank and credit card statements. Use all 3 cards and compare the fees and exchange rates while you are abroad.Bid-Ask Practice19Use these USD bid-ask quites on the euro and yen Euro: $1.20 – $1.40 (Direct quote for the euro) Yen: ¥75.5 – ¥95.3 (Indirect quote for the yen)1. How many USD would you receive if selling 1000 yen? Y1000 * (low $/Y) (1/95.3) = $10.492. How many USD would it cost to buy 1000 yen? Y1000 * (high $/Y) (1/75.5) = $13.253. How many yen would it cost to buy $500? $500 * (High Y/$) (95.3) = Y47,6504. How many yen would you receive if selling $500? $500 * (Low Y/$) (75.5) = Y37,7505. How many euro would you receive if selling $500? $500 * (Low €/$) (1/1.4) = €357.146. How many USD would you receive if selling 1000 euro? €1,000 x (low $/€) (1.2) = $1,2007. How many euro would it cost to buy $500? $500 x (high €/$) (1/1.2) = €416.67Topic #3 Assigned Problems20What is the interbank Canadian dollar price of a Mexican peso?C$/P = C$/$ * $/P = (1/.96)*(1/12.7) = C$ .08202 / PWhat is the bid Kronor retail price of a Swiss Franc? Low Kr/Sf = Low Kr/$ x Low $/Sf = 5.8 x .82 = 4.756How many euros could Bank X get for 100,000 yuan?Yuan 100,000 * (Euro/Yuan = Euro/$ * $/Yuan) (1/1.3 * 1/6.76) = Euro 11,379.15 How many pounds could Bank X get for 5,000,000 yen?Yen 5,000,000 * (Pound/Yen = Pound/$ * $/Yen = 1/1.57 * 1/ 85.18) = Pounds 37,388.04 How many Swiss francs would it cost to buy 2,000 kronor? Kr2000 x High Sf/Kr = Kr2000 x (1/0.82)*(1/5.8)=Sf 420.52How many Swedish kronor could a tourist get for $500?$500 * Kr5.8/$ = Kr 2,900Institutional (Interbank) Rates Retail Cash RatesUSDCNY = 6.76 EURUSD = $1.30 Swedish Kronor Kr5.80 – 7.90 (Kr/$)USDMXN = 12.7 GBPUSD = $1.57 Swiss Franc $.82 - 1.07 ($/Swiss)USDJPY = 85.18 CADUSD = $0.96 Topic #3 Assigned Problems21How many USD would it cost a tourist to buy 250 Swedish kronor?Kr 250 * $/Kr (1/5.8) = $43.10How many Swiss francs could a tourist get for $100?$100 * Sf/$ (1/1.07) = Sf 93.46 How many USD would it cost to buy 500 Swiss francs?Sf 500 * $/Sf (1.07) = $535.00How many USD would it cost to withdrawal 500 euros from an ATM if your bank marks up the interbank rate by 3%, charges $5 per withdrawal, and the ATM fee is €7?Euro =(500+7) * $/Euro (1.3) * 1.03 + 5 = $683.90 How many USD would it cost to charge 500 euros on your credit card if your bank marks up the interbank rate by 2.5%, the merchant charges 3%, and the finance charge is 28% APR for one month?Euro 500 * $/Euro (1.3) * 1.025 * 1.03 * (1+.28/12) = $702.25 How many USD would it cost to get 500 euros at the airport cash kiosk if the bid-ask is +/- 10% of the interbank rate?Euro 500 * $/Euro (1.3) * 1.1 = 715.00Institutional (Interbank) Rates Retail Cash RatesUSDCNY = 6.76 EURUSD = $1.30 Swedish Kronor Kr5.80 – 7.90 (Kr/$)USDMXN = 12.7 GBPUSD = $1.57 Swiss Franc $.82 - 1.07 ($/Swiss)USDJPY = 85.18 CADUSD = $0.96 Textbook22Shapiro and Sarin’s Foundation of Multinational Finance 6th Ed. Chapter 6 covers the forex markets and exchange rates includingSpot quotesBid-ask and SpreadDirect-indirect quotesCurrency CodesThe forward marketCross ratesAdditional problems using exchange ratesiClicker: Class Evaluation23How would you rate today’s class? Highest Lowest