Tài chính doanh nghiệp - Global finance

Topic #8: Retail Foreign Exchange Transactions: Bid-Ask, Credit and Debit TransactionsL. GattisThe Pennsylvania State UniversityGlobal Finance1Before class: Call your credit and ATM card issuers and ask them to list the fees for foreign ATM withdrawal or Credit Card purchaseFor Credit Card: fees may include issuer fee % and Visa/MC fee%For Debit Card: fees may include ATM fee, Foreign ATM fee, 1-3% foreign transaction costLearning Objectives2convert currencies using bid and ask quotationscalculate the total cost of using cash, credit or debit in forex transactionsRetail Bid – Ask Exchange Rates (2/29/16)3Currency offices at the airport use one exchange rate for buying and one for selling. Listed below are the Travelex USD rates on 2/29/16. Travelex will buy (customer sells) the denominator currency at the low (bid) price and sell the denominator currency at the high (ask) price. In addition, there is a $7.95 processing charge.Euro$0.93075/€ – $1.27065/€Brazilian RealR$3.3394/$ – R$4.8400/$Customer buys euros (selling dollars) at this priceCustomer buys dollars (selling reais) at this priceDirect Retail Bid-Ask Quotations4How many euros can you buy for $100?Since you are buying euros and selling dollar – use ASK$100 x ASK (1€/$1.27065) = €78.70Alternative rule: Customer always loses – gets less, pays more $100 x “Lowest €/$ Rate” (1 / High 1.27065) = €78.70 The total cost of €78.70 is $100 + $7.95 fee = $107.95 for an effective “all in” exchange rate of $107.95/€78.70 = $1.37166Bid $0.93075/€ – Ask $1.27065/€Customer Price to Sell € (Buy $)Customer Price to Buy € (Sell $)Bid (Low) Price of €Ask (High) Price of €Direct Retail Bid-Ask Quotations5How much will it cost to buy €100?Since you are buying euros and selling dollar – use ASK€100 x ASK ($1.27065/€) = $127.07Alternative rule: Customer always loses – gets less, pays more €100 x “Highest $/€ Rate” $1.27065 = $127.07The total cost of €100 is $127.07 + $7.95 fee = $135.02 for an effective “all in” exchange rate of $135.02/€100 = $1.3502/ €Bid $0.93075 – Ask $1.27065Customer Price to Sell € (Buy $)Customer Price Buy € (Sell $)Bid (Low) Price of €Ask (High) Price of €Interbank “Wholesale” Bid - Ask Rates (2/29/16)6These rates are bid – ask rates for financial institutions (FI).Like consumers, FIs buy high and sell low in the wholesale market. But, the wholesale market spreads are much smaller.Travelex could buy €100 at the ask price of $1.0878 or $108.78Profit from buying €100 in the wholesale market and selling them to a cosumer = $135.02 (from prior slide) – $108.78= $26.24Retail Indirect Bid-Ask Quotations7How much would it cost to buy R$100?Since you are buying Reais and Selling Dollar – Use BIDR$100 x “USD Ask” (1/R$3.3394) = $29.95Alternative rule: Customer always loses – gets less, pays more R$100 x “Highest Rate” (1/Low Kr3.3394/$) = $29.95The total cost of R$100 is $29.95 + $7.95 fee = $37.90 for an effective exchange rate of R$100/$37.90 =R$2.64/$Bid R$3.3394 – Ask R$4.8400Price to Sell $ / Buy RPrice Buy $ / Sell RBid (Low) Price of $Ask (High) Price of $Interbank “Wholesale” Bid - Ask Rates (2/29/16)8These rates are bid – ask rates for financial institutions (FI).Like consumers, FIs buy high and sell low in the wholesale market. But, the wholesale market spreads are much smaller.Travelex could buy R$100 at the bid price of (R$100*1/3.9715)=$25.18Profit: $37.90 (from prior slide) – $25.18= $12.72Poll9Suppose USDMXN quote is P12/$ Bid- P13/$ Ask. How many USD would it cost to buy 1,000 pesos?$76.92$83.33$12,000$13,000Cross Rates10Suppose you have €100 from a previous vacation and you want to use them to buy reais at an American airport. Since both currencies are foreign, you may be asked to sell the euros to buy USD and then sell the USD to buy reais – paying fees both times The interbank rates are $1.0876/€ and R$3.9713/$, which is a wholesale cross rate of R/€ of R/$*$/€)=3.9713*1.0876=R4.32/€You will receive $85.13 (€100*.93075-$7.95 fee) for the €100Then receive R257.73 (($85.13-7.95 fee)*R3.3394/$) for the $85.13That’s an effective rate of R257.73/€100=R2.58/€, that’s 40% from than the interbank rate -- ouchEuro$0.93075/€ – $1.27065/€Brazilian RealR$3.3394/$ – R$4.8400/$Alternatives to Airport Currency Kiosks – Debit Cards11Use 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 but charge a 1-5% feeTypically 1-2% Visa/MC fee and 0%-3% issuing bank feeYour issuing bank may also charge you a fee per withdrawal of $3-$15The foreign bank that owns the ATM will also charge you another fee of $5-$10 (denominated in the foreign currency)Total Cost: Market Rate x (1+fee%) + Your Bank ATM Fee + Foreign ATM FeeAlternatives to Airport Currency Kiosks – Debit Cards12Total Cost: Market Rate x (1+fee%) + 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 debit card fee is 3%, your bank fee is $10.00 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 Cards13Use 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 0-5% fee)Some foreign businesses charge a fee of credit card fee of 3-5%Using 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+bank fee%) x (1+financing rate) if not paid by the end of the month or cash withdrawal Alternatives to Airport Currency Kiosks – Credit Cards14Total Cost: Market Rate x (1+foreign business fee%) x (1+bank fee%) x (1+financing rate) Problem: You use your credit card to charge a £150 item. The bank fee 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? Poll15On your arrival to London you need £20 for a 72-hour, 6-zone pass on the Underground. You may use Travelex cash, credit, or an ATM withdrawal. Which is cheapest (in USD)? Mkt = $1.57 / £Which is the cheapest USD cost?TravelexATMCreditMarket/TravelexTrx: $1.43–$1.85/£Fee: $7.95ATM Withdrawal3% Bank Fee$8 Bank Fee₤5 ATM Fee Credit Purchase3% CC Fee12% APR (1 Mo)No Merchant feeTravel FX Suggestions16Avoid currency exchange offices: local banks and hotels are often better Find an international bank ATM to withdrawal local currency (Satander, Citibank, BofA)Convert/Withdrawal large amounts at a time since there are fixed feesUse credit cards whenever possible to make purchasesDo not sell the currency back at the end of your tripNever, ever exchange one foreign exchange for another foreign exchange (e.g., non-USD in U.S., or non-EUR in Europe)If you must get currency before you travel, try ordering online for next day delivery and pay a lower rate ($1.22 vs. airport $1.27 on 2/29/16) and a pay small delivery fee ($9.99) at travelex.com. Call your bank for better deals.