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?