Danish Krone

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Danish Krone

• Darcie Carr
• Catherine Patterson
• Joe Kennedy
• Jeffrey Allinson

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Daneland???
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Understanding the Krone

• Joined European Union in 1973
• Since rejected single European currency twice
• Denmarks Nationalbank responsible for monetary
  policy
• Danish Krone pegged to the Euro
• Current DKK/USD exchange rate
• 5.9088

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Technical Analysis (30 Day)

• Market Momentum
• Moving Average
• Bollinger Band

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Market Momentum 30 days
6 MONTH
1 YEAR
3 MONTH
1 MONTH
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Moving Average 30 days
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Bollinger Band 30 days
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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

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Non-Parity Models

• Asset Choice Interest Rate Differential Model
• Balance of Payments Model

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Asset Choice Model
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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

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Asset Choice Model
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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)

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Balance of Payments Model
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Balance of Payments
(DKK Millions) (DKK Millions) (DKK Millions) (DKK Millions)
December January February
Trade Balance 818 -1408 2009
Current Account 253 -4458 -1378
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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

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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

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Parity Models

• Relative Purchasing Power Parity Model
• International Fisher Effect

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Relative PPP

• Inflation rates
• 5 year average
• Current Spot rate 5.9088
• PPP 5.9088(1.0198)5 / (1.02552)5 5.745842

INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION 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
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Relative PPP 2005 Calculation

• 5.9088 (1.018)5 / (1.0339)5 5.468214
• ?Appreciation of 1.59
• ?Strengthening of currency

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International Fisher Effect

• 5 yr bonds
• U.S. Treasury Yield 4.91 (April 2006)
• Denmark Govt. bond 3.59 (March 2006)
• 5.908 (13.59)5 5.545558
• (14.91)5

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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

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IMPORTANT

• Denmarks 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 Denmarks Nationalbank.

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Questions?