Harvard Business School 9-701-122
April 5, 2001
Professor Robert E. Kennedy prepared this exercise as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation.
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Exchange Rate Exercise
This short exercise is intended to test your knowledge of exchange rates. It is designed to be
used with Exchange Rate Terminology and Analytics (HBS case 701-121).
Question 1: Exchange Rate mechanics
You are considering exchanging Swiss Francs (SF) for Japanese Yen (JY). You go to the bank and
see the following rates posted:
Swiss Franc/USD: 1.6933 Yen/USD: 115.44
A. What is the JY/SF exchange rate?
a) 68.1746 b) 0.01467 c) 195.4746 d) 117.1333
B. What is the SF/JY exchange rate?
a) 68.1746 b) 0.01467 c) 195.4746 d) 117.1333
C. If the Swiss Franc appreciates by 10%, what would the new JY/SF rate be?
a) 175.927 b) 61.353 c) 74.987 d) 215.022
D. If the Yen lost 25% of its value against the Franc (relative to the figures quoted before
question A), what would the new JY/SF rate be?
a) 85.213 b) 51.128 c) 90.888
701-122 Exchange Rate Exercise
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Question 2: Mexican Textiles
Consider a Mexican textile firm that knits sweaters for sale in the United States. The firm incurs
total costs of 16 pesos/sweater and sells the sweaters to a U.S. department store for 5 USD/sweater.
The exchange rate is 4 peso/USD.
A. What is the firm’s markup per sweater as a percentage of revenues?
a) 25% b) 4% c) 31% d) 20%
B. If the peso is devalued 20%, what is the new exchange rate?
a) 3.2 peso/$ b) 5 peso/$ c) 4.8 peso/$ d) 3.33 peso/$
C. If the firm keeps dollar prices and peso costs constant, what is its markup per sweater as a
percentage of revenues after the devaluation?
a) 0% b) 4% c) 33% d) 36%
D. If the firm decides to keep its gross margin per sweater constant (at 20%) and expand sales,
what would the new dollar price be following the devaluation?
a) $4.00 b) $3.84 c) $3.75 d) $4.25
Question 3:
GM is considering purchasing a electrical components plant located in Hungary. All sales will be
to Hungarian customers and denominated in forints. The projected investment and returns are
as follows:
• Purchase price: 30 billion forints
• Additional investment required: 50 million USD. All imported equipment
priced in USD.
• Projected Hungarian sales: 45 billion forints
• Projected earnings 4.5 billion forints.
• Exchange rate: 300 forints/USD
A. What is the total investment (in dollars)?
a) 10 million b) 100 million c) 90 million d) 150 million
Exchange Rate Exercise 701-122
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B. Once the plant is up and running, what is the annual percentage return on investment?
a) 10% b) 15% c) 5.6%
C. If the forint is devalued by 25%., what would the new exchange rate be?
a) 375 HF/$ b) 400 HF/$ c) 225 d) 240 HF/$
D. If this 25% devaluation was made after the purchase and additional investments were
completed, what would the new ROI be?
a) 7.5% b) 12.5% c) 11.25% d) 18.75%
E. Instead of selling to the Hungarian market, assume that all sales were exports priced in hard
currency, and yielding the same 4.5 billion forint earnings (at the original 300 forint/USD
exchange rate). If the 25% devaluation described in questions C and D occurred, what would
happen to the plant’s profit margins?
a) they would rise by about 25%
b) they would fall by about 25%
c) they rise by more than 25%
d) they would call by less than 25%