EXCHANGE RATES

Topic objectives with taxonomy levels

1. Identify the exchange rate between two currencies from a given table or rate board.

2. Use a given exchange rate to determine the value of one currency for a specific
quantity of another currency.

3. Perform currency conversion calculations, taking into account currency exchange

fees charged by banks and other financial institutions.

4. * Explain how the Big Mac Index' provides a tool for determining the worth of one
currency in relation to another currency;

* Explain why it is not necessarily accurate when a South African tourist in America
exclaims that a can of cool drink that costs $2,00 (R14,00) is much cheaper in
South Africa.

What is an exchange rate?

An exchange rate is the rate at which one currency will be exchanged for another. It is
also regarded as the value of one country's currency in relation to another currency.

Taxonomy level 1 : How to identify the exchange rate between two currencies from a
given table or rate board.

The table below shows the exchange rate between the rand and other major currencies
on a particular day.

1. The currency which will be exchanged with

other currencies. In this case, it is the South
African Rand

South African Rand 1 rand is worth 1 unit is worth

Euro (EUR) 0,114 16,78

British Pound (GBP) 0,123 21,90

American Dollar (USD) 0,654 18,89

2. The currencies that the 3. The value of the South African 4. The value of other
South African Rand will be Rand in other currencies e.g 1 currencies in South African
exchanged with. South African Rand equals to Rands e.g 1 American
0,114 European Euros Dollar equals to 18,89
South African Rands
 EXERCISE 1
Use the table above to answer the following questions
1. What is the value of 1 Euro in South African Rands ?
2. What is the value of 1 South African Rands in British Pounds?

Taxonomy level 2 : How to use a given exchange rate to determine the value of one
currency for a specific quantity of another currency

Example: Karabo wants to buy a pair of sneakers on an American website. The price of
the sneakers is $ 150. How will the sneakers cost in South African Rands if $1= R 22,89?

How to use the conversion factor or exchange rate

1. The unit on the left-hand $1 = R 30,89 2. Use the unit on the right-hand
side should always side to convert.
represent 1 unit of a
currency

3. IF the currency you are

converting is the same currency
as the currency on the right-hand
side , you are going to divide the
amount with the currency on
the right-hand side.

OR

4. IF the currency you are

converting differs from the
currency from the right-hand
side, you are going to multiply
the amount with the currency
on the right-hand side.

Example 1: Karabo wants to buy a pair of sneakers from an American website. The price
of the sneakers is $ 150. How much will the sneakers cost in South African Rands if
$1= R 22,89?
Answer:
$ 150 x R 22,89
Amount being converted : $ 150
= R 3 433,50
Conversion factor : $1 = R 22,89
Because the currency of the amount being converted differs from the currency of the
amount on the right-hand side, the amount being converted will be multiplied by the
amount on the right-hand side

Example 2: John has R 560. He wants to buy a jacket that costs $ 123,50.Does he have
enough money to purchase the jacket if the conversion factor is $ 1 = R19, 67
Answer:
Amount being converted :R 560 R 560 ➗ R 19,67
Conversion factor: $ 1 = R 19, 67 = $ 28,46

No, he does not have enough money.

Because the currency of the amount being converted is the same as the currency of the
amount on the right-hand side, the amount being converted will be divided by the
amount on the right-hand side.

Example 3 : David is in Great Britain and he wants to send his mother money. He decided
to send his mother ￡600. How much will his money receive in South African Rands if

￡40 = R 650?
1. The unit on the left-
hand side should ￡40 = R 650
always represent 1
unit of a currency

Therefore, the unit on the left-hand side should be divided by its value so it represents
1 unit of the currency.
￡40 = R 650
40 40

Therefore the conversion factor is : ￡1 = R 16,25

After determining the conversion factor, now you can convert the amount that needs to
be converted.

Answer: ￡600 x R 16,25

Amount being converted : ￡600
= R 9 750
Conversion factor: ￡1 = R 16,25
Because the currency of the amount being converted differs from the currency of the
amount on the right-hand side, the amount being converted will be multiplied by the
amount on the right-hand side

EXERCISE 2
A woman wants to exchange ￡450 into euro.

1. How many Euros will she receive if the exchange rate is ￡1= €1,60

2. She spends € 385, therefore she is left with € 335. How many British pounds will she
have if the exchange rate changes to ￡1= €1,40?

3. Her friend decides to send her € 698. How many British pounds will she have in total if
the exchange rate changes to € 2 = ￡3,45.

Taxonomy level 3: Perform currency conversion calculations, taking into account

currency exchange fees charged by banks and other financial institutions.

International banks and other financial institutions charge their customers transaction
fees. This usually takes place when a customer wants to transfer money to another
country or region. Every bank or financial institution uses a criteria which they use in order
to charge the customer for each transaction.

Example 1: Kgotso wants to send his cousin money in Limpopo. His cousin does not
have a bank account hence Kgotso decided to send the money through Buy-rite’s money
market transfer.
Buy-rite’s money market charges R 10 per transaction.

Kgotso’s cousin needs R 500 , how much should Kgotso transfer through Buy-rite’s
money market?

Answer: R 500 + R 10 (transaction) = R 510

Kgotso needs transfer R510 which includes the transaction fee.
Understanding transfer options
The criteria created for banks vary as each bank charges for a certain services.
Let's evaluate the criteria used by Global Union International Bank
The Western Union Bank uses the offers transfer options:
• Credit/debit card to cash pickup with immediate transfer - $99.99.
• Pay in-store to cash pickup with immediate transfer - $10.00.
• From bank account to cash pickup with 4 business days transfer - $21.00.
• Credit/debit card to bank account with 2 business days transfer - $45.00.
• Bank account to bank account with 6 business days transfer - $0.99
• Pay in-store to bank account is not available.

Example 2: Kyle is a teacher who has recently relocated to China. His sister, Mary wants
to buy a jacket she saw at Cotton On. The Jacket is priced at R 699,99. Mary asked Kyle
to loan her money to buy the jacket. Kyle wants to transfer the money through Global
Union Bank. Kyle receives his salary in US dollars and the exchange rate is $1=R 18,23.

Understanding transfer options

The Western Union Bank uses the following transfer options:
• Credit/debit card to cash pickup with immediate transfer - $99.99.
• Pay in-store to cash pickup with immediate transfer - $10.00.
• From bank account to cash pickup with 4 business days transfer - $21.00.
• Credit/debit card to bank account with 2 business days transfer - $45.00.
• Bank account to bank account with 6 business days transfer - $0.99
• Pay in-store to bank account is not available.

2.1 Calculate how much Kyle must send in Rands if he sends the money using the bank
account to cash pickup with 4 business days transfer option.

Answer: $1= R 18,23 1. The cash pickup with 4 business days

$ 21 x R 18,23 transfer fee had to be converted in Rands
= R 382,83

R 699,99 + R 382,83
= R 1 082,82 2. The amount of the jacket and transfer fee are
added together to indicate the money that must
be sent.

2.2 Use the answer in 2.1 to determine the amount in US dollars if $1= R 18,23.

Answer: $1= R 18,23

R 1 082,82
R 18,23
= $ 59,10
EXERCISE 4

1. John wants to buy a sneaker from an American website. The value of the sneaker is
$156,23 and the website charges $ 15 for International shipping. Calculate how much
John in total if R23= $17.
2. Determine the value of R 456 in Pound if ￡1= R 23,98.
3. Khumo banks wants to send money to her cousins in American. She chose Global
Bank to conduct the transaction. Below are the transfer options that Global Bank
offers.
The Western Union Bank uses the following transfer options:
• Credit/debit card to cash pickup with immediate transfer - $99.99.
• Pay in-store to cash pickup with immediate transfer - $10.00.
• From bank account to cash pickup with 4 business days transfer - $21.00.
• Credit/debit card to bank account with 2 business days transfer - $45.00.
• Bank account to bank account with 6 business days transfer - $0.99
• Pay in-store to bank account is not available.

3.1 Calculate how much she must transfer in Rands if she wants to send her cousins
R 4500 if the exchange is $1= R15,09. (she used the Credit/debit card to bank
account with 2 business days transfer option).

Taxonomy level 4: Explain how the Big Mac Index provides a tool for determining
the worth of one currency in relation to another currency.
Explain why it is not necessarily accurate when a South African tourist in America
exclaims that a can of cool that costs $ 2 (R 14) is much cheaper in South Africa.
The Big Mac index was introduced in The Economist in September 1986 by Pam Woodall as a
semi-humorous illustration of PPP and has been published by that paper annually since then. The
index also gave rise to the word burgernomics.

One suggested method of predicting exchange rate movements is that the rate between two
currencies should naturally adjust so that a sample basket of goods and services should cost the
same in both currencies. In the Big Mac Index, the basket in question is a single Big Mac burger as
sold by the McDonald's fast food restaurant chain. The Big Mac was chosen because it is available
to a common specification in many countries around the world as local McDonald's franchisees at
least in theory have significant responsibility for negotiating input prices. For these reasons, the
index enables a comparison between many countries' currencies.

The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big
Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency).
This value is then compared with the actual exchange rate; if it is lower, then the first currency is
under-valued (according to PPP theory) compared with the second, and conversely, if it is higher,
then the first currency is over-valued.