Understanding Currency Exchange Rates: A Three-Part Exercise Developments in Business Simulation and Experiential Learning, Volume 26, 2999 UNDERSTANDING CURRENCY EXCHANGE RATES: A THREE-PART EXERCISE Annette L. Halpin, Beaver College ABSTRACT Students enrolled in business programs today are required to understand and appreciate the interdependence of nations in our global economy. This paper describes an exercise that can be used in any business course to teach the topic of currency exchange rates. Using information from the Wall Street Journal and play money from three countries, students are placed in scenarios that require them to complete several transactions using different currencies. INTRODUCTION Currency exchange rates are usually presented in one of the last chapters of the principles of finance texts (Gallagher & Andrews, 1997; Moyer, McGuigan & Kretlow, 1998; Ross, Westerfield & Jaffe, 1999) or not at all in some ‘condensed’ versions (Brigham & Houston, 1996). There are at least two disadvantages to covering this material near the end of a course. First, the professor is usually pressed for time. Second, many students will have great difficulty grasping the basic concept of converting dollars to a foreign currency or vice versa in a short time frame. These conditions limit the discussions on cross rates, purchasing power parity, interest rate parity, and managing exchange rate risk. Given the increased calls from academics (Hitt, 1998), accrediting associations (AACSB-The International Association for Management Education, 1994; ACBSP News, 1997) and practitioners (Baker & Armstrong, 1996; Lublin, 1992; U.S. News & World Report, 1991) for educational initiatives which prepare students for the global workplace, business programs should expose students, at a minimum, to the topic of exchange rates. The exercise described in this article is intended to aid students in becoming proficient and comfortable with converting currencies using both exchange rates and cross rates. It is a three- part exercise intended for use over several weeks of a term. Each part requires 20-25 minutes to complete. By presenting this material in small doses during a course, by the time the international chapter is covered near the end of the term students should be prepared for the more challenging topics in the chapter. If the international chapter is not covered, students still have learned important material for use in a future course or on a trip to a foreign country. THE EXERCISE Objectives The objectives of this exercise are to have students: (1) learn how exchange rates are quoted; and (2) convert the currencies of three countries using a series of scenarios involving a traveler to two foreign countries. Participants For classes of up to twenty students divide the class in half. One half will be assigned the role of the ‘Traveler’. The other half will play the role of the ‘Banker/Retailer’. Each group should designate one of its members as its spokesperson. For larger classes, divide the class into an even number of groups then pair the groups off with one group designated the ‘Traveler’ and the other as the ‘Banker/Retailer’. 209 Developments in Business Simulation and Experiential Learning, Volume 26, 2999 Materials A calculator and play money from the United States and two other countries are needed. The amount in each currency should be roughly equal to U.S. $100. Bills in several denominations and coins should be included in order for the transactions to be completed accurately. Place the currency of each country in a separate billfold/envelope. For the exercise described here the two foreign currencies are British pounds and French francs. Mark the outside of the billfold with the U.S. currency ‘Traveler’, that with the British currency ‘Banker/Retailer - England’ and that with the French currency ‘Banker/Retailer - France’. Time Approximately 20-25 minutes for each part. Procedure - Part 1 Distribute to each student a copy of a recent Currency Trading section of the Wall Street Journal including both exchange rates and cross rates along with the handout labeled ‘Currency Exercise - Part I’ (See Appendix I). Focus first on the Exchange Rates section of the newspaper, and then explain the various columns as well as the difference between spot and future rates. Spend roughly 10 minutes answering the four questions under ‘Exchange Rates’. Two of these questions pertain to the currencies that the students will be working with--pounds and francs. In the last 10 minutes of this session, explain how cross rates are used to convert one currency to another. Then, answer the three questions under ‘Cross Rates’. Procedure - Part 2 Distribute to each student a copy of a recent Currency Trading section of the Wall Street Journal (including both exchange rates and cross rates) along with the handout labeled ‘Currency Exercise - Part 2’ (See Appendix II). Give the billfold labeled ‘Traveler’ to the spokesperson for that group and the other two billfolds to the spokesperson for the ‘Banker/Retailer’ group. Have all students answer section ‘I’ of the handout. It should take roughly 10 minutes to translate these currency amounts. After this, have students read section ‘II’ of the handout describing a scenario in a foreign country. Each group should focus on those questions pertaining to its role as either the traveler or banker/retailer. Allow roughly 5-7 minutes for the discussion within groups then ask the spokespeople to conduct the first transaction using the play money (U.S. dollars and British pounds). If there is disagreement as to the amount to be paid, review briefly the exchange rate tables until there is agreement between the two parties. After this exchange, the traveler pays the banker/retailer for the tube pass. Upon completion of the second transaction collect the three billfolds of money (without changing their contents) for safekeeping until Part 3 of the exercise. Procedure - Part 3 Distribute to each student a copy of a recent Currency Trading section of the Wall Street Journal (including both exchange rates and cross rates) along with the handout labeled ‘Currency Exercise - Part 3’ (See Appendix III). Give the billfold labeled ‘Traveler’ to the spokesperson for that group and the other two billfolds to the spokesperson for the ‘Banker/Retailer’ group. Have all students answer section ‘I’ of the handout. This should take 5-10 minutes. After completing section ‘I’ have students read section ‘II’, The Scenario in London. As before, each group should focus on those questions pertaining to its role (traveler or banker/retailer). Allow 2-3 minutes for 210 Developments in Business Simulation and Experiential Learning, Volume 26, 2999 discussion then ask each spokesperson to conduct the first transaction using the play money (U.S. dollars and British pounds). If there is disagreement as to the amount to be paid, review briefly the exchange rate tables until there is agreement between the two parties. Once this exchange takes place, move on to section ‘III’. Allow 2-3 minutes just for students to read through ‘The Scenario in Paris’, including their particular questions. Focus on the first question for 2-3 minutes reminding students to use the cross rates information to arrive at an answer. Completing questions 2 and 3 will take an additional 5-7 minutes. Variations to the Exercise Here are some additional guidelines and suggestions for the use of this exercise: 1. This exercise can be used in any business course--not just principles of finance. In fact, starting in September 1998 it was used in our introductory business course, International Business. This early exposure to currency exchange rates is important to our population since fully 60% of our freshmen will spend their Spring Break in London as part of our London Preview Program. By the time these students are juniors and taking the principles of finance course, they should be comfortable using exchange rate tables to convert currencies. 2. Using the three parts of this exercise over several weeks allows students to appreciate the changes in rates over time. Point out whether a currency has gone up or down in value relative to the U.S. dollar by comparing rates from one time to another. 3. If time allows, this exercise can be expanded to include a visit to a third country. 4. The instructor should do all calculations ahead of time to know both the correct answer to each question plus how much money should be held in each billfold after each transaction. 5. The two foreign currencies used here were chosen because of access to play money from those countries. Any two countries can be substituted and if there is no foreign currency available continue to use three billfolds/envelopes but simply write the amounts of money that each would contain after the transactions occur. CONCLUSION The exercise described here provides students an opportunity to learn a concept that may be applied to their own lives in the immediate or near future. Students today are enjoying the benefits of world travel at an earlier age and for many part-time students, they have already been exposed to currency exchange rates as either vacationers or business travelers. Presenting this topic formally provides a broader understanding of currency valuation and illustrates how to use the published currency tables. APPENDIX I Currency Exercise - Part 1 I. From the Currency Trading section of the WSJ Exchange Rates 1. How many U.S. dollars does it take to buy 1 British pound? 2. How many U.S. dollars does it take to buy 1 French franc? 3. How many Japanese yen does it take to buy 1 U.S. dollar? 4. How many Mexican pesos does it take to buy 1 U.S. dollar? Cross Rates 1. One British pound is equivalent to how many French francs? 211 Developments in Business Simulation and Experiential Learning, Volume 26, 2999 2. One Canadian dollar is equivalent to how many Japanese yen? 3. One Japanese yen is equivalent to how many British pounds? APPENDIX II Currency Exercise - Part 2 I. From the Currency Trading section of the WSJ Exchange Rates 1. How many U.S. dollars does it take to buy 1 British pound? 2. How many U.S. dollars does it take to buy 10 French francs? 3. How many Spanish pesetas does it take to buy U.S. $20.00? Cross Rates 1. One Mexican peso is equivalent to how many British pounds? 2. One thousand Italian lira are equivalent to how many French francs? 3. Five British pounds are equivalent to how many Japanese yen? II. The Scenario A traveler arrives in London for a one-week business trip. At the airport she has only U.S. currency but wants to purchase transportation for the next several days. A one-week pass on the ‘tube’ will cost 16 British pounds. Traveler - Using the exchange rate table provided, answer the following questions. 1. You give the bank teller U.S. $60.00 to be exchanged for British pounds. How many pounds do you expect to receive? 2. Pay the retailer the correct number of pounds for the weekly tube pass. In U.S. dollars, what is the price of the pass? Banker/Retailer - Using the exchange rate table provided, answer the following questions. 1. You are to exchange U.S. $60.00 for British pounds. Give the correct number of pounds to the customer. 2. Collect the correct number of pounds for the weekly tube pass. In U.S. dollars, what is the price of the pass? APPENDIX III Currency Exercise - Part 3 I. From the Currency Trading section of the WSJ Exchange Rates 1. How many U.S. dollars will it take to buy 70 French francs? 2. How many Japanese yen will it take to buy U.S. $50.00? Cross Rates 1. 50,000 ECUs are equivalent to how many German marks? 2. 80 Canadian dollars are equivalent to how many French francs? II. The Scenario in London The traveler in London wants to exchange her last U.S. $40.00. Traveler - Using the exchange rate table provided, answer the following question. You give the bank teller U.S. $40.00 to be exchanged for British pounds. How many pounds do you expect to receive? Banker/Retailer - Using the exchange rate table provided, answer the following question. 212 Developments in Business Simulation and Experiential Learning, Volume 26, 2999 You are to exchange U.S. $40.00 for British pounds. Give the correct number of pounds to the customer. III. The Scenario in Paris After the traveler exchanges the last of her American currency and returns to the hotel an urgent message is received asking her to travel to Paris for the weekend--all expenses paid. Jumping at the chance, she departs London and arrives in Paris within a few hours. Once there she has no need for currency but as she is about to leave Paris she decides to exchange all her pounds for francs in order to buy some souvenirs. Traveler - Using the exchange rate table provided, answer the following questions. 1. You give the bank teller all of your British pounds. How many pounds do you have? How many francs do you expect to receive? 2. You do not want to return to London with any pounds so spend as many francs as you can by selecting from the following items. (Purchase no more than one of any item). Stuffed Animal - 152 francs Bottle of Wine - 96 francs Ceramic Mug - 55 francs Bottle of Men’s Cologne - 230 francs Pay the banker/retailer for the items. 3. You decide you want to exchange the remaining francs for pounds. How many francs do you have remaining after making your purchases? How many pounds do you expect to receive for the francs you are exchanging? Banker/Retailer - Using the exchange rate table provided, answer the following questions. 1. You are to exchange the British pounds you receive for French francs. How many pounds do you receive? Give the correct number of francs to the customer. 2. As the retailer you will be receiving francs from the traveler for the purchase of several items. Make sure the total received is correct. 3. As the banker you will be asked to exchange the remaining francs for pounds. How many francs will be exchanged? Give the correct number of pounds to the customer. REFERENCES AACSB-The International Association for Management Education. (1994). Standards for Business Accreditation, c.1.1. ACBSP News. (1997). Globalization and the Formation of GABE. September, p. 9. Baker, S. & Armstrong, L. (1996, September 30). The New Factory Worker. Business Week, p 59. Brigham, E.F. & Houston, J.F. (1996). Fundamentals of Financial Management. Fort Worth: Dryden Value Press. Gallagher, T.J. & Andrews, J.D. (1997). Financial Management: Principles and Practice. New Jersey: Prentice Hall. Hitt, M.A. (1998). Twenty-First-Century Organizations: Business Firms, Business Schools, and the Academy. The Academy of Management Review, 23: 218-224. Lublin, J.S. (1992, March 31). Younger Managers Learn Global Skills. The Wall Street Journal, p. B1. Moyer, R.C, McGuigan, J.R. & Kretlow, W.J. (1998). Contemporary Financial Management (7th ed.). Ohio: South-Western. Ross, S.A., Westerfield, R.W. & Jaffe, J. (1999). Corporate Finance (5th ed.). Boston: Irwin/McGraw-Hill. U.S. News & World Report. (1991). Getting a global M.B.A. November 11. p. 87. 213 Table of Contents Volume 26, 1999 ABSEL's Historical Research Interests Back From the Future: An ABSEL Merlin Exercise for the Year 2005 The Contributions of ABSEL During the 1980's ABSEL's Contributions to Experiential Exercises in the 90's ABSEL's Contributions to Experiential learning/Experiential Exercises: The Decade of the 1970's Business Simulations - Algorithms and Model Enhancements: A 25 year Review A Study of the ETS General Field Test as an AACSB Assessment Tool and the Impact of Experiential Exercises and Simulation on Learning A Framework for Assessing the Competencies Reflected in Simulation Performance Developing A Learning Culture: Assessing Changes in Student Performance and Perception Financial Simulation Using Distributed Computing Technology Analyzing Managers' Judgements and Decisions with an Educational Business Simulation Understanding Your Business through Home-Made Simulator Development An Examination of a Reanalysis of the Impact of a Market Leader on Simulation Competitors' Strategies Applying Shocks to TE Simulations: A Demonstration Increasing Efficiency of Management Skill Assessment A Testbank for Measuring Total Enterprise Simulation Learning Developing Leadership Skills - Video Live! LEADSIMM: Collaborative Leadership Development for the Knowledge Society A Team Approach to Producing Multi-Media Laptop and Video Formatted Presentation Tinkertoys Revisited: Exploring Trust Based Relationships Overall Dominance in Total Enterprise Simulation Performance Success or Bankruptcy: The Relationship between Personal and Goal Orientation and Simulation Performance Assessing the Effects of Feedback: Muti-method and Muti-directions in Multi-pedagogical Courses The Missing Ingredients in Experiential Learning Purpose and Learning Benefits of Business Simulations: A Design and Development Perspective Building Capabilities for Change through Laboratory Simulations Modeling Innovation as a Process of Design in Educational Business Simulation The Need to Measurer variance in Experiential Learning and a New Statistic to do so Assessing Effectiveness of an Experiential Oriented Course Over Time Developing Participant Satisfaction Models of Experiential Exercises in Business Education Perceptions of Learning in TE Simulations Students' View on the Use of Business Gaming in Hong Kong Management Gaming's Lost Opportunity: Meditations about the Russian Experience and Prospects for the Future Unanticipated Enhancements in the Business Strategy and Policy Game when Running in Windows 95 Using a Business Game to Demonstrate Broad Business Concepts A New Model for Business Courses (Getting the Student Connected) Seeing the Forest and the Trees: Integrating Knowledge Using Large Scale Simulations in Capstone Business Strategy Classes Is It Here To Stay? A Roundtable Discussion of the Inter-Group Interaction Interactive Tools Used in Applying Financial Concepts Strengthening Essential Skills through a Finance Exercise: Calculation of Beta A Model of Currency Exchange Rates Understanding Currency Exchange Rates: A three-part Exercise Student Experiences in the World Intercollegiate Business Game Competition Student Experiences in the International-Collegiate Business Policy Game Competition Using Boards of Directors in Simulation Environments: Comments From Board Members Sharing Best Practices: Teaching Smarter, Not Harder Star Power: A Simulation for Understanding Power and Empowerment The Marketing Game: A Marketing Principles Simulation Alexander Islands: GSSM Tiny Business Simulator on the WWW Putting Strategy into Strategic Business Games Industry Analysis, Porter's Five Forces Model and Strategic Group Maps in the Business Strategy Game Simulation The Use of Concept Mapping to Improve Student Performance and Understanding of Strategic Management Concepts: A Comparison of Techniques Transformational thinking in the Organizational Behavior Course: The Use of Metaphor as an Assessment Tool Creation of a Virtual Learning Community for the Global Virtual Enterprise Project Inter Institutional use of Educational Resources: Joint Use of Management Simulation Games Business Insights: Theory and Practice with the Aid of a Business Simulation Progress: An Experiential Exercise in Development Marketing The ABC's of teaching the Theory of Constraints to Undergraduate Business Students Demonstrating Principles of Organizational Purchasing Behavior through an Experiential Exercise The Virtual Manager: A Different Simulation for Managing Complexity When the Rules are changing and Chaos Breeds Innovation: Recapturing the Value of Constructive Thinking and Play in Simulation Training The Pitfalls, and Potential, of Actual Events as Problem Drivers Using Business Games to teach Environmental Awareness and Green Management: The International Experience with the ENSIM Game A Review of my ABSEL-Related Work Simulation of Government: A Workshop Using GEO Creating Internet-Based Games Using Perl and JavaScript Who's on First? Exploring the Concepts of Problem-Based Learning, Experiential Learning, and Lifelong Learning Students Learn Customer Service and Selling while Conducting Research So You Want to Run an NFL Football Team–An Honors Interdisciplinary Project Supervised Internship: The Employer's Perspective Using Computer Assisted Simulation to Teach International Business Strategy: A Case of the Multinational Management Game (MMG) Multi-Cultural Experiential Learning: A Computer Simulation in China An Appreciative Stance on Diversity as We Move into the 21st Century: A Timeline Exercise to Identify Key Experiences in Good Work Relationships between Black and White Peers A Day in the Life of an Interactive, Real Time, and Internet Delivered Course: A Demonstration Comparing Internet Search Engines: An Experiential Learning Exercise Total Enterprise Simulations and the Internet: Assessing Student Perceptions and Preferences Teaching Accounting Information Systems in a Practicum Format Providing Experiential Learning in Accounting through a Field Study Payroll Project A Spreadsheet Based Business Simulation Game Computer-Behavioral Simulations Training for Project Managers Simulation Scenarios - Rationale and Illustration