Danish Krone Darcie Carr Catherine Patterson Joe Kennedy Jeffrey Allinson.

Danish Krone

Darcie CarrCatherine PattersonJoe KennedyJeffrey Allinson

Daneland???

Understanding the Krone

Joined European Union in 1973 Since rejected single European currency

twice Denmark’s Nationalbank responsible

for monetary policy Danish Krone pegged to the Euro

Current DKK/USD exchange rate: 5.9088

Technical Analysis (30 Day)

Market Momentum Moving Average Bollinger Band

Market Momentum – 30 days

1 YEAR

6 MONTH

3 MONTH

1 MONTH

Moving Average – 30 days

Bollinger Band – 30 days

Implications for U.S. Firm

Open Long Position: Stay open Benefit from exchange rate OR purchase put option

Open Short Position: Hedge

call option or forward contract

Currency Speculators: Currency at a high Short Sell

Good strategy for VERY short term traders

Non-Parity Models

Asset Choice Interest Rate Differential Model

Balance of Payments Model

Asset Choice Model

LIBOR RATES

01234

EURO

KRONER

Asset Choice Model

Interest rates are dependent upon those of the Euro Gradually rates have increased over the

past year increase desirability of investment within Denmark

Asset Choice Model

LIBOR Interest Rates and DKK/USD Exchange Rate

0

1

2

3

4

5

6

7

April

May

June Ju

ly

Augus

t

Septe

mbe

r

Octobe

r

Novem

ber

Decem

ber

Janu

ary

Febru

ary

Mar

chApr

il

DKK/USD

LIBOR Interest rates

Implications for U.S. Firm

**Danish interest rates mirror Euro interest rates**

Asset Choice: Higher Interest Rates (Euro Rates

Increase) implies increase in demand U.S. (4.75%) higher than Denmark

U.S. has better returns for business However, U.S. has higher implied corruption

risk (CPI)

Balance of Payments Model

Balance of Payments Model

-6000

-4000

-2000

0

2000

4000

6000

8000

Trade Balance (fob)

Current account

Balance of Payments

(DKK Millions)

December January February

Trade Balance

818 -1408 2009

Current Account

253 -4458 -1378

Balance of Payments

Over the last year a trade balance surplus along with a current account surplus have placed upward pressure on the currency

Recent publications of cartoon jihad caused boycott of Danish products in Arab countries However, clear rebound

on both sides in recent months

Implications for U.S. Firm

**Danish interest rates mirror Euro interest rates**

Balance of Payments: Krone will strengthen over next few

months Recovery from Jihad Scandal

Better to take long position

Parity Models

Relative Purchasing Power Parity Model

International Fisher Effect

Relative PPP

Inflation rates *5 year average

Current Spot rate: 5.9088 PPP= 5.9088[(1+.0198)^5

/ (1+.02552)^5]= 5.745842

INFLATION‘01 ‘02 ‘03 ‘04 ‘05

US 2.83 1.59 2.27 2.68 3.39 *2.552

DKK 2.4 2.4 2.1 1.2 1.8 *1.98

Relative PPP 2005 Calculation

5.9088 [(1+.018)5 / (1+.0339)5] = 5.468214

Appreciation of 1.59% Strengthening of currency

International Fisher Effect

5 yr bonds: U.S. Treasury Yield 4.91 (April 2006) Denmark Govt. bond = 3.59 (March

2006) 5.908 * (1+3.59%)5 = 5.545558

(1+4.91%)5

Implications for U.S. Firm

U.S. company with long position: Keep open long position

benefit from long term Krone strengthening U.S. company with open short position:

Forward position to hedge against unfavorable movements

Importers and Exporters (into Denmark): Goods imported into Denmark will be cheaper

for the Danish and therefore demanded Goods exported out of Denmark will be more

expensive for other countries

IMPORTANT

Denmark’s currency movement and underlying monetary policy are heavily influenced by the ECB. Thus, for interest rate changes, inflationary expectations, and results of such changes, the ECB should be consulted concurrently with Denmark’s Nationalbank.

Questions?