Transcript PF-L5 - Killarney School

30S Applied Math
Mr. Knight – Killarney School
Unit: Personal Finance
Lesson: Foreign Exchange
Foreign Exchange
PF-L5 Objectives:
Perform Calculations relating to
Foreign Exchange
Learning Outcome B-1
Slide 1
30S Applied Math
Mr. Knight – Killarney School
Unit: Personal Finance
Lesson: Foreign Exchange
Banks and credit unions can supply foreign exchange
rates on request. These rates fluctuate daily and, in
fact, some rates change so often that these
institutions will not quote the rates until the actual time
of the transaction.
For example, one day at 9:00 a.m. the US dollar might
equal 1.5238 and at 1:00 p.m. the US dollar could be
1.5236.
Theory – Unit Pricing Intro
Slide 2
30S Applied Math
Mr. Knight – Killarney School
Unit: Personal Finance
Lesson: Foreign Exchange
Did you know that people buy and sell money quite
commonly?
Let us suppose that you have 100 Canadian dollars
and you want to convert them to American dollars for
a trip to Florida. At the bank, you will hand over your
money and receive the American money in return. In
reality, the transaction that has taken place is that you
sold your Canadian funds to the bank who paid you in
American funds. Another way to look at the
transaction is that you purchased American
funds from the bank and used Canadian
dollars as payment.
Theory – Calculating Unit Prices
Slide 3
30S Applied Math
Mr. Knight – Killarney School
Unit: Personal Finance
Lesson: Foreign Exchange
In this example, Canadian currency is worth less than
American; you didn't get $100 American for $100
Canadian. But there is more to the story. In our
scenario, you have the good luck to get a credit card
from your parents and you return home with the
American dollars that you had purchased. You return
to the bank to sell the American funds and are
surprised to get less than the $100 Canadian that you
started with. It turns out that financial institutions make
a profit on buying and selling currencies. They will buy
back your American dollars for less money than you
paid for them.
Example – Calculating Unit Price
Slide 4
30S Applied Math
Mr. Knight – Killarney School
Unit: Personal Finance
Lesson: Foreign Exchange
The ways in which foreign exchange rates are stated by
institutions vary, but most will state a buying rate and a
selling rate. Some lists will state the values from the
customer's point of view and others will state the values
from the institution's point of view. This is sometimes
confusing, but remember that the
higher rate is always the rate at which
the bank charges the customer and the
lower rate is always the rate at which
the bank will buy the currency from
the customer.
Theory – Other Factors
Slide 5
30S Applied Math
Mr. Knight – Killarney School
Unit: Personal Finance
Lesson: Foreign Exchange
Instead of buying and selling money, we will look at a more familiar
example where money is exchanged for a product.
Your uncle buys and then sells vegetables from his market-garden
stand. He has asked you to help with the business. One day you are
asked to pick up 100 kg of carrots. You buy them from the wholesaler at
$1.35 / kg. At the vegetable stand, you plan to sell them for $2.35 / kg.
You buy at one price and sell at a higher price. The increase will cover
transportation, spoilage, other operating costs, and also the profit.
If the banking example is applied, then money is the product
and the difference between buying and selling price is one way
that banks earn money to pay expenses and make profits.
The example of buying and selling funds gets more complicated
because the value of the money being purchased is not the same as the
money used to pay for it.
Theory – Produce Example
Slide 6
30S Applied Math
Mr. Knight – Killarney School
Unit: Personal Finance
Lesson: Foreign Exchange
At your local bank, the buying rate for the Mexican peso is
$0.1454 and the selling rate is $0.1660. These are the rates at
which the bank will buy and sell. This means that if you (the
customer) buy, you will pay their selling rate. For example, if
you buy 200 pesos, they will sell them to you for $0.1660 x 200
= $ 33.20 CDN.
Notice that there are two things happening.
One is the difference in the value of the
currencies, pesos compared to dollars.
The other is the difference in the buy/sell
rates. If you changed your mind and
immediately wanted to sell the pesos back to the bank, you
would receive $0.1454 x 200 = $29.08 CDN.
Theory – Buying & Selling
Slide 7
30S Applied Math
Mr. Knight – Killarney School
Unit: Personal Finance
Lesson: Foreign Exchange
We will use the Currency Exchange table shown below for the
calculations in the following examples. All decimal values
represent Canadian Dollars.
Buying
Country
Currency
Selling
1.4786
USA
dollar
1.5326
2.3825
U.K.
pound
2.4551
0.9198
AUSTRALIA
dollar
0.9766
0.1144
AUSTRIA
schilling
0.1214
0.8087
GERMANY
mark
0.8501
0.2408
FRANCE
franc
0.2531
0.1511
0.03912
MEXICO
PHILIPPINES
peso
peso
0.1629
0.04036
You are selling foreign currency.
You are buying foreign currency.
Bank is buying your foreign
Bank is selling you foreign
currency for x Canadian dollars.
currency for x Canadian dollars.
(Foreign Currency) x (Rate) = CDN $ (Foreign Currency) x (Rate) = CDN $
you receive from sale.
Exchange Rate Table
you pay to buy currency
Slide 8
30S Applied Math
Mr. Knight – Killarney School
Buying
Unit: Personal Finance
Lesson: Foreign Exchange
Country
Currency
Selling
1.4786
USA
dollar
1.5326
2.3825
U.K.
pound
2.4551
0.9198
AUSTRALIA
dollar
0.9766
0.1144
AUSTRIA
schilling
0.1214
0.8087
GERMANY
mark
0.8501
0.2408
FRANCE
franc
0.2531
0.1511
MEXICO
peso
0.1629
0.03912
PHILIPPINES
peso
0.04036
Test Yourself
Slide 9
30S Applied Math
Mr. Knight – Killarney School
Buying
Unit: Personal Finance
Lesson: Foreign Exchange
Country
Currency
Selling
1.4786
USA
dollar
1.5326
2.3825
U.K.
pound
2.4551
0.9198
AUSTRALIA
dollar
0.9766
0.1144
AUSTRIA
schilling
0.1214
0.8087
GERMANY
mark
0.8501
0.2408
FRANCE
franc
0.2531
0.1511
MEXICO
peso
0.1629
0.03912
PHILIPPINES
peso
0.04036
Test Yourself
Slide 10
30S Applied Math
Mr. Knight – Killarney School
Buying
Unit: Personal Finance
Lesson: Foreign Exchange
Country
Currency
Selling
1.4786
USA
dollar
1.5326
2.3825
U.K.
pound
2.4551
0.9198
AUSTRALIA
dollar
0.9766
0.1144
AUSTRIA
schilling
0.1214
0.8087
GERMANY
mark
0.8501
0.2408
FRANCE
franc
0.2531
0.1511
MEXICO
peso
0.1629
0.03912
PHILIPPINES
peso
0.04036
Test Yourself
Slide 11