Wednesday, November 5, 2014

Exchange Rate Movements -- January 2014 to Halloween 2014


Question:  The chart below has information on exchange rate movements for five currencies with respect to the U.S. $.   All exchange rates are stated in terms of foreign currency per U.S. dollar.  

How has the U.S. dollar fared between January and Halloween 2014?

A person takes $5,000 U.S. dollars in January 2014 and converts the money to foreign currency ($1,000 in each currency).   The foreign currency is placed in a shoebox and converted back to dollars on Halloween.  

How many dollars does this person have on Halloween?


Exchange Rate Movements January to Halloween 2014
Foreign Country
2-Jan-14
31-Oct-14
% Difference
China
6.0504
6.1124
1.0%
Japan
104.84
112.09
6.9%
EU
0.7315
0.7981
9.1%
United Kingdom
0.6082
0.6250
2.8%
Canada
1.0634
1.1272
6.0%


Data source for this exercise:
List of countries with exchange rate data:


How has the dollar fared?

Very well!  The exchanges in the table are expressed in terms of foreign currency per dollar.   The dollar gained in value against all countries in the chart.

The largest increase was for the EU.  (The European economy appears really weak right now and that weakness is affecting the currency.)  The dollar increased by the least amount against the Chinese Yuan.

The median increase of the dollar against the five currencies over this period was 6.0%.

How much money did an investor who converted from dollars to foreign currency in January and back to dollars at Halloween lose?

Financial results for a U.S. investor who takes $1,000 in each of the five currencies in January 2014 and converts back to dollars on Halloween are presented below.


Losses from Poorly-time
International Diversification
Foreign Country
Initial $ Investment
Foreign Currency January 2014
Converted Dollars Halloween
China
$1,000
6050
$990
Japan
$1,000
104840
$935
EU
$1,000
732
$917
UK
$1,000
608
$973
Canada
$1,000
1063
$943
Total
$5,000
$4,758

Notes: 

The foreign currency in January is just FC/$ in January times $1,000.

The dollars at Halloween are just FC i(n middle column) divided by FC/$ at Halloween.   Remember the person is putting the foreign currency into a shoe box.


Bottom Line: 

The investor lost $242 by speculating in the foreign currency.   This is a drop of slightly less than 5.0%.  

Future posts will look at a wider range of currencies and will look at the possibility of the investor taking money out of the shoe box. 



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