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Danish Krone

Danish Krone. Darcie Carr Catherine Patterson Joe Kennedy Jeffrey 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

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Danish Krone

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  1. Danish Krone Darcie Carr Catherine Patterson Joe Kennedy Jeffrey Allinson

  2. Daneland???

  3. 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

  4. Technical Analysis (30 Day) • Market Momentum • Moving Average • Bollinger Band

  5. Market Momentum – 30 days 6 MONTH 1 YEAR 3 MONTH 1 MONTH

  6. Moving Average – 30 days

  7. Bollinger Band – 30 days

  8. 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

  9. Non-Parity Models • Asset Choice Interest Rate Differential Model • Balance of Payments Model

  10. Asset Choice Model

  11. 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

  12. Asset Choice Model

  13. 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)

  14. Balance of Payments Model

  15. Balance of Payments

  16. 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

  17. 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

  18. Parity Models • Relative Purchasing Power Parity Model • International Fisher Effect

  19. Relative PPP • Inflation rates • *5 year average • Current Spot rate: 5.9088 • PPP=5.9088[(1+.0198)^5 / (1+.02552)^5]= 5.745842

  20. Relative PPP 2005 Calculation • 5.9088 [(1+.018)5 / (1+.0339)5] = 5.468214 • Appreciation of 1.59% • Strengthening of currency

  21. 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

  22. 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

  23. 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.

  24. Questions?

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