CHAPTER

Business Measurements and Currency Conversion

PERFORMANCE OBJECTIVES

22

Section I: The U.S. Customary System

1: Converting and solving problems involving length. (2) 2: Converting and solving problems involving surface or square measure. (3) 3: Converting and solving problems involving volume or capacity. (4) 4: Converting and solving problems involving weight. (6) 5: Converting and solving problems involving time. (7)

Section II: The Metric System

6: Understanding and converting metric units of length, volume, and weight. (8) 7: Understanding and converting metric units of surface area. (10) 8: Converting and solving problems involving metric to U.S. and U.S. to metric measurements. (10) 9: Converting and solving problems involving temperature. (12)

Section III: Currency Conversion

10: Converting foreign currency to U.S. dollars and U.S. dollars to foreign currency (14)

Measuring is the act of assigning a number to a quantity in order to represent its magnitude. It is one of the connecting links between mathematics and the physical world. Historically, units of measurement were related to various parts of the human body. The cubit, for example, was the length of the forearm from the elbow to the end of the middle finger, about 18 inches. The foot was said to be the length of a kings foot, varying over the years from 9 to 18 inches. Two steps of a soldier was a pace, and 1,000 paces was a mile. The weight of a pint of ale was called a pound, and thus the old saying, A pint is a pound, the world around. As technology and trade Progressed over time, more accurate and permanent standard units were established for weights and measures. Measurements are used in all aspects of business activity on a daily basis. Builders, architects, designers, and decorators are involved with measures of length and area. Warehouse managers and those involved in the shipping and handling of goods use weight and capacity calculations constantly. Managers of wholesale and retail businesses use surface measures such as floor space and shelf space allocations. In business, these calculations are often combined with dollar amounts to arrive at price per unit of measure, such as cost per square foot. Production lines use measurements of all kinds to manufacture an endless variety of products. Until recently, the United States primarily recognized a cumbersome system of weights and measures known as the U.S. customary or English system. This system, brought to the United States by the colonists, uses the familiar units of yards, feet, and inches for length; ounces, pounds, and tons for dry weight; and ounces, pints, quarts, and gallons for liquid measure. In 1971, the United States began a gradual transition to a system used

U.S. customary, or English system A system of weights and

measures, long used in the United States, using inches, feet, and yards for length; ounces, pounds, and tons for dry weight; and ounces, pints, quarts, and gallons for liquid measure.

Chapter 22: Business Measurements and Currency Conversion

metric system The standard

international metric system of measurement, known as SI, is a decimal system of weights and measures, based on 10. The basic units are the meter for length, the liter for volume, and the gram for weight.

nearly worldwide known as the metric system. Although the U.S. government legalized the metric system for commerce and trade in 1866, it has not been widely accepted in this country. Today, as more and more U.S. companies do business overseas, and an increasing number of foreign companies do business in the United States, it becomes necessary for all the countries of the world economic community to recognize and use the same system of measurements. Aimed at helping U.S. industries stay competitive, the latest official U.S. government action regarding metrics is a provision within the American Technology Pre-eminence Act, signed into law in February 1992. The legislation includes amendments to the Fair Packaging & Labeling Act, requiring all packaging and labeling to use metric measurements for net quantities as the primary system for measuring quantity. The use of ounces and pounds, commonly used as measurements in the past, has now become optional. Section I deals with the U.S. customary, or English, system, which is still widely used in this country. Todays businessperson should still have a working knowledge of this system. Section II covers the metric system of measurement, and the conversions between the U.S. and the metric systems. You need to be able to use the tables in this section to solve measurement problems and readily convert from one system to the other. Dont try to memorize these conversions, just remember where you put the tables! Section III explains currency conversion; how to convert foreign currency to U.S. dollars and U.S. dollars to foreign currency. This important procedure is used by businesses and individuals involved in international investment, travel, and trade.

22
22-1
EXAMPLE

SECTION I

The U.S. Customary System

The following measurement and conversion tables are for the U.S. customary system. They are separated into the categories of linear or straight measure; surface or square measure; volume, liquid, and dry measure; weight measure; and time. The measurement tables are a complete listing for each category, while the conversion tables are for the most commonly used units. After looking them over, you will probably find that many of them are already familiar to you. Use the tables to solve the exercises at the end of each category. Your answers should be rounded to the nearest tenth.

CONVERTING AND SOLVING PROBLEMS INVOLVING LENGTH

Linear or straight measure is a one-dimensional unit, measuring the distance of something. Linear measurements are used in most businesses on a daily basis.

linear or straight measure A onedimensional unit, measuring the distance or length of something.

ED: UPDATE ALL EXAMPLE HEADINGS?

How many feet are in 16 yards of electrical wire?
SOLUTION STRATEGY

To solve this problem, look up yards to feet in the conversion table. From the table we find this conversion is calculated by multiplying the number of yards by 3. Yards 3 3 5 Feet 16 3 3 5 48 hours

Section I: The U.S. Customary System

Measurement TableLinear or Straight Measure

U.S. Customary Unit inch (in.) foot (ft) yard (yd) rod (rd) furlong (fur) mile (mi) statute, land mile (nm) nautical, sea U.S. Equivalents .083 foot 1 3 yard, 12 inches 3 feet, 36 inches 1 1 5 2 yards, 16 2 feet 1 8 mile, 220 yards 1,760 yards, 5,280 feet 1.151 statute miles

Conversion TableLength
To Convert From feet yards yards miles To inches inches feet feet Multiply number number number number of of of of feet by 12 yards by 36 yards by 3 miles by 5,280 To Convert From inches inches feet feet To feet yards yards miles Divide number number number number of of of of inches by 12 inches by 36 feet by 3 feet by 5,280

EXERCISES
Convert the following measurements as indicated:

TRY IT

1. 105 ft 5

yd

2. 156 in. 5

ft

3. On a flight from Dallas to San Francisco, the pilot announces that the plane will be flying at 35,000 feet. How many miles high is the plane? (Round to a tenth of a mile.)

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16.

CONVERTING AND SOLVING PROBLEMS INVOLVING SURFACE OR SQUARE MEASURE

Surface area or square measure represents the product of two dimensions, length and width. These measurements are labeled as square units, such as square inches or square feet. The formula for square measure is Area 5 Length 3 Width

22-2
surface area, or square measure Measure representing the
product of two dimensions, length and width, measured in square units.

EXAMPLE
How many square yards are in 180 square feet of material?
SOLUTION STRATEGY

EXAMPLE

To solve this problem, look up square feet to square yards in the conversion table. From the table we find this conversion is calculated by dividing the number of square feet by 9. Square yards 5 Square feet 180 5 5 20 square yards 9 9

Chapter 22: Business Measurements and Currency Conversion

Measurement TableSurface or Square Measure

U.S. Customary Unit square inch (sq in.) square foot (sq ft) square yard (sq yd) acre (a) square mile (sq mi) U.S. Equivalents .007 square feet 144 square inches 1,296 square inches 9 square feet 43,560 square feet 4,840 square yards 640 acres

8' 6' 12' 8' 15' 10'

Conversion TableSurface Area

To Convert From square feet square yards acres square miles To square inches square feet square yards acres Multiply number of sq ft by 144 number of sq yd by 9 number of acres by 4,840 number of sq mi by 640 To Convert From square inches square feet square yards acres To square feet square yards acres square miles Divide number of sq in. by 144 number of sq ft by 9 number of sq yd by 4,840 number of acres by 640

TRY IT

EXERCISES
Convert the following measurements as indicated:

4. 540 sq in. 5 _____ sq ft

5. 5 acres 5 _____ sq yd

6. How many square miles is a ranch containing 5,696 acres of land?

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22-3
volume, or capacity The size or extent of a three-dimensional object, measured in cubic units.

CONVERTING AND SOLVING PROBLEMS INVOLVING VOLUME OR CAPACITY

Volume or capacity is the size or extent of a three-dimensional object, measured in cubic units. It is calculated by the formula: Volume 5 Length 3 Width 3 Height Volume is divided into three categories: capacity, liquid measure, and dry measure. Capacity units are the measure of the size of a container, such as a cardboard box with 800 cubic inches of space, a railroad boxcar with 2,000 cubic feet of space, or a warehouse with 10,000 cubic yards of storage space. Liquid units are the measure of liquid quantities, such as quarts of milk, gallons of water, or barrels of oil. Dry units are the measure of nonliquid quantities, such as pints of strawberries, or bushels of wheat.

Section I: The U.S. Customary System

Measurement TableVolume or Capacity Measure

U.S. Customary Unit cubic inch (cu in.) cubic foot (cu ft) cubic yard (cu yd) U.S. Equivalents .00058 cubic foot 1,728 cubic inches 27 cubic feet
3 feet 3 feet 3 feet

Liquid Measure
U.S. Customary Unit fluid ounce (fl oz) pint (pt) quart (qt) gallon (gal) barrel (bbl) U.S. Equivalents 8 fluid drams 16 fluid ounces 2 pints 4 quarts varies from 31 to 42 gallons

1 CUBIC YARD EQUALS 27 CUBIC FEET

Dry Measure
U.S. Customary Unit pint (pt) quart (qt) peck (pk) bushel (bu) U.S. Equivalents quart 2 pints 8 quarts 4 pecks
1 2

1 QUART EQUALS 1/4 OF A GALLON

1 PECK IS EQUAL TO 1/4 BUSHEL

Conversion Table-Volume, Liquid, and Dry Measure
To Convert From Volume cubic feet cubic yards Liquid pints quarts gallons Dry quarts pecks bushels To cubic inches cubic feet fluid ounces pints quarts pints quarts pecks Multiply number of cu ft by 1,728 number of cu yd by 27 number of pints by 16 number of quarts by 2 number of gallons by 4 number of quarts by 2 number of pecks by 8 number of bushels by 4 To Convert From Volume cubic inches cubic feet Liquid fluid ounces pints quarts Dry pints quarts pecks To cubic feet cubic yards pints quarts gallons quarts pecks bushels Divide number of cu in. by 1,728 number of cu ft by 27 number of fl oz by 16 number of pints by 2 number of quarts by 4 number of pints by 2 number of quarts by 8 number of pecks by 4

EXAMPLE
How many quarts of milk can be packaged from a container tank holding 2,350 gallons?
SOLUTION STRATEGY

EXAMPLE

To solve this problem, look up gallons to quarts in the conversion table. From the table we find that this conversion is calculated by multiplying the number of gallons by 4. Gallons 3 4 5 Quarts 2,350 3 4 5 94,000 quarts

Chapter 22: Business Measurements and Currency Conversion

TRY IT

EXERCISES
Convert the following measurements as indicated:

7. 80 fl oz 5 _____ pt

8.

12 pk 5 _____ qt

9. A large grocery store purchases a bushel of strawberries for $45. The store sells them for $1.19 per pint. a. b. How many pints of strawberries are in the bushel? How much gross profit is made if all the pints are sold? (Gross profit 5 Sales 2 Cost of merchandise sold)

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22-4
weight The measure of the heaviness or
mass of something.

CONVERTING AND SOLVING PROBLEMS INVOLVING WEIGHT

Weight is the measure of the heaviness of something. These measurements are found extensively in the business world, particularly in the areas of production and distribution of goods. For example, a production manager may measure the output of a machine in pounds per hour, or the cost of steel in dollars per ton.

EXAMPLE

EXAMPLE
What is the weight in tons of 25,000 pounds of potatoes?
SOLUTION STRATEGY

To solve this problem, look up pounds to tons in the conversion table. From the table we find that this conversion is calculated by dividing the number of pounds by 2,000. Pounds 5 Tons (short) 2,000 25,000 5 12.5 tons 2,000

Measurement TableAvoirdupois Weight

U.S. Customary Unit grain (gr) dram (dr) ounce (oz) pound (lb) hundredweight (cwt) ton, short (t) ton, long U.S. Equivalents .036 dram 27.344 grains 16 drams 16 ounces 7,000 grains 100 pounds 2,000 pounds 1.12 short tons 2,240 pounds

Conversion Tableweight
To Convert From pounds tons (short) tons (long) To ounces pounds pounds Multiply number of pounds by 16 number of tons by 2,000 number of long tons by 2,240 To Convert From ounces pounds pounds To pounds tons (short) tons (long) Divide number of ounces by 16 number of pounds by 2,000 number of pounds by 2,240

Section I: The U.S. Customary System

EXERCISES
Convert the following measurements as indicated:

TRY IT

10. 48 oz 5 _____ lb

11. 4 lb 5 _____ oz

12. If John weighs 173 lb 12 oz, and Sam weighs 88 oz less, how much does Sam weigh?

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CONVERTING AND SOLVING PROBLEMS INVOLVING TIME

Time is the measure of the duration of an event. Time measurement and conversions are used continually, not only in business, but in peoples everyday activities.

22-5
time The measure of the duration of an
event.

EXAMPLE
If a project took 270 minutes to complete, how many hours did it take?
SOLUTION STRATEGY

EXAMPLE

To solve this problem, look up minutes to hours in the conversion table. From the table we find that this conversion is done by dividing the number of minutes by 60. Minutes 5 Hours 60 270 5 4.5 hours 60

Measurement TableTime
Standard Units minute (min) hour (hr) day (da) week (wk) month (mo) quarter (qtr) year (yr) Equivalents 60 seconds 60 minutes 24 hours 7 days 1 43 weeks 13 weeks 3 moths 4 quarters 12 months 52 weeks 365 days, 366 leap year 10 years 10 decades 100 years 100 decades 1,000 years

decade century millennium

Conversion TableTime
To Convert From minutes hours days weeks years To seconds minutes hours days months Multiply number number number number number of of of of of minutes by 60 hours by 60 days by 24 weeks by 7 years by 12 To Convert From seconds minutes hours days months To minutes hours days weeks years Divide number number number number number of of of of of seconds by 60 minutes by 60 hours by 24 days by 7 months by 12

Chapter 22: Business Measurements and Currency Conversion

TRY IT

EXERCISES
Convert the following measurements as indicated:

13. 72 hr 5 _____ day

14. 2.5 min 5 _____ sec

15. You have just received a loan from The Bank of America for 66 months. For how many years is this loan?

CHECK YOUR ANSWERS WITH THE SOLUTIONS ON PAGES 1617.

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22-6

SECTION II

The Metric System

The standard international metric system of measurement, known as SI, is a decimal system (based on the number 10) and is one of the easiest and most useful measuring systems ever established. A group of scientists developed the metric system after the French Revolution in 1789. Although it was slow to be accepted for many years, by 1875 it was adopted as the international standard of weights and measures.

UNDERSTANDING AND CONVERTING METRIC UNITS OF LENGTH, VOLUME, AND WEIGHT

The metric system is divided into three basic units: the meter, the liter, and the gram. The meter (m) is the basic unit of length and is slightly longer than a yard. The liter (l) is the basic unit of volume and is slightly larger than a quart. The gram (g) is the basic 1 unit of weight and is about 28 of an ounce. A penny weighs about 2 1 grams. 2 The metric system uses a series of prefixes to designate quantities larger or smaller than the basic units. Each quantity is a factor of 10 of the preceding prefix.

meter (m) The basic unit of

measurement for length in the metric system.

liter (l) The basic unit of measurement for volume in the metric system. gram (g) The basic unit of
measurement for weight in the metric system.

Metric Prefixes
For numbers larger than the basic unit, use the prefixes: deca- (dk) hecto- (h) kilo- (k) 10 times the basic unit 100 times the basic unit 1,000 times the basic unit Example: 1 decameter (dkm) 5 10 meters Example: 1 hectoliter (hl) 5 100 liters Example: 1 kilogram (kg) 5 1,000 grams

For numbers smaller than the basic unit, use the prefixes: deci- (d) centi- (c) mili- (m)
1 10 of the basic unit 1 100 of the basic unit 1 1,000 of the basic unit

Example: 1 deciliter (dl) 5 .1 of a liter Example: 1 centimeter (cm) 5 .01 of a meter Example: 1 milligram (mg) 5 .001 of a gram

Because the metric system is based on decimals, we convert to larger and smaller units by moving the decimal point to the right and to the left. Each place the decimal moves to the right is the same as multiplying by 10. Each place the decimal moves to the left is the same as dividing by 10. Use the chart below and the following steps to convert between metric measurements.

Section II: The Metric System

STEPS FOR CONVERTING METRICS TO METRICS: Step 1. Count the places between the two prefixes being converted. Step 2. Move the decimal point that number of places to the left or right.
kilohectodecaBasic Unit deci(meter, liter, gram) centimilli-

STEPS

EXAMPLE
Convert 3.57 kilometers to meters.
SOLUTION STRATEGY

EXAMPLE

From the chart, a conversion from kilometers to the basic unit, meters, is a move of three places to the right:
3 kilohectodecaBasic Unit Grams deci2 centi1 milli-

Therefore, to convert a distance of 3.57 kilometers to meters, move the decimal point three places to the right. 3.57 kilometers 5 3,570 meters

EXAMPLE
Convert 5,500 milligrams to grams.
SOLUTION STRATEGY

EXAMPLE

From the chart, a conversion from milligrams to grams is a move of three places to the left:
1 kilohecto2 deca3 Basic Unit Meters decicentimilli-

Therefore, to convert a weight of 5,500 mg to grams, move the decimal point three places to the left. 5,500 milligrams 5 5.5 grams

EXERCISES
Convert the following as indicated:

TRY IT

16. 32 cm 5 _____ m

17. 12.5 kg 5 _____ g

18. 6.71 5 _____ ml

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10

Chapter 22: Business Measurements and Currency Conversion

22-7
are (a) A unit of measurement in the
metric system used to measure surface area; it equals 100 square meters.

UNDERSTANDING AND CONVERTING METRIC UNITS OF SURFACE AREA

In the metric system, the basic unit for surface measure is the square meter. Remember, when measuring surface area, we use the formula Area 5 Length 3 Width. One hundred square meters equal an are (a). An are is a surface measure of 10 meters by 10 meters. A unit known as a hectare (ha) is equal to 10,000 square meters, or a surface area of 100 meters by 100 meters. A hectare is approximately 2.5 acres.

hectare (ha) A unit of measurement in

the metric system used to measure surface area; it is equal to approximately 2.5 acres.

Conversion TableMetric Surface Area

To Convert From ares hectares hectares To Convert From square meters ares square meters To square meters ares square meters To ares hectares hectares Multiply number of ares by 100 number of hectares by 100 number of hectares by 10,000 Divide number of square meters by 100 number of ares by 100 number of square meters by 10,000

EXAMPLE

EXAMPLE
If a field measures 25,000 square meters, how many hectares is this?
SOLUTION STRATEGY

To solve this problem, look up square meters to hectares in the conversion table. From the table we find that this conversion is calculated by dividing the number of square meters by 10,000. Hectares 5 Square meters 25,000 5 5 2.5 hectares 10,000 10,000

TRY IT

EXERCISES
Convert the following as indicated:

19. 16.5 hectares 5 _____ square meters

20. 2,690 ares 5 _____ hectares

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22-8

CONVERTING AND SOLVING PROBLEMS INVOLVING METRIC TO U.S. AND U.S. TO METRIC MEASUREMENTS
The following alphabetical conversion table can be used to convert the most common U.S. and metric units. Note that the math procedure for each conversion is multiplication. Remember, dont try to memorize the conversion factors; learn to use the conversion tables as your tools! In everyday business, the more frequently you use various measurements, both U.S. and metric, the more familiar they will become.

Section II: The Metric System

11

Conversion TableMetric to U.S. and U.S. to Metric

To Convert From acres ares bushels centimeters centimeters cubic centimeters cubic inches cubic inches cubic yards feet gallons grams hectares inches kilograms kilograms kilometers liters liters liters liters liters To hectares square yards liters inches yards cubic inches cubic centimeters liters cubic meters meters liters ounces acres centimeters pounds tons miles cubic inches gallons quarts (dry) ounces (fluid) quart (fluid) Multiply acres by .4047 ares by 119.6 bushels by 35.238 centimeters by .3937 centimeters by .01094 cubic centimeters by .061 cubic inches by 16.3872 cubic inches by .0164 cubic yards by .7656 feet by .3048 gallons by 3.7854 grams by .0353 hectares by 2.471 inches by 2.54 kilograms by 2.2046 kilograms by .0011 kilometers by .6214 liters by 61.025 liters by .2642 liters by .9081 liters by 33.7838 liters by 1.0567 yards To Convert From meters meters meters miles ounces (dry) ounces (fluid) pecks pints (dry) pints (fluid) pounds quarts (dry) quarts (fluid) square centimeters square feet square inches square meters square meters square meters square yards tons (short) tons (short) tons (metric) meters To feet inches yards kilometers grams liters liters cubic centimeters cubic centimeters kilograms cubic centimeters liters square inches square meters square centimeters square inches square feet square yards square meters kilograms tons (metric) tons (short) yards by .9144 Multiply meters by 3.2808 meters by 39.370 meters by 1.094 miles by 1.6093 ounces by 28.35 ounces by .0296 pecks by 8.8096 pints by 550.41 pints by 473.179 pounds by .4536 quarts by 1101.23 quarts by .9463 square centimeters by .155 square feet by .0929 square inches by 6.4517 square meters by 1550.0 square meters by 10.764 square meters by 1.196 square yards by .836 tons by 907.1846 tons (short) by .9072 tons (metric) by 1.1023

EXAMPLE
How many liters of gasoline will be required to fill a 12-gallon tank? Round to the nearest tenth.
SOLUTION STRATEGY

EXAMPLE

To solve this problem, look up gallons to liters in the conversion table. From the table we find that this conversion is calculated by multiplying the number of gallons by 3.7854. Liters 5 Gallons 3 3.7854 Liters 5 12 3 3.7854 5 45.4 liters

12

Chapter 22: Business Measurements and Currency Conversion

TRY IT

EXERCISES
Convert the following, as indicated (round answers to the nearest tenth where needed):

21. 69 pounds 5 _____ kilograms 23. 15 meters 5 _____ inches

22. 800 square meters 5 _____ square feet 24. 30 liters 5 _____ quarts (dry)

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22-9
temperature A measure of the
warmth or coldness of an object or substance.

CONVERTING AND SOLVING PROBLEMS INVOLVING TEMPERATURE

Temperature is a measure of the warmth or coldness of an object or substance. The U.S. customary system measures temperature in degrees Fahrenheit (F), while the metric system uses degrees Celsius (C). In the Celsius temperature scale, 0 degrees is the freezing point of water, and 100 degrees is the boiling point of water. To convert from Celsius to Fahrenheit, use the formula: F 5 1.8C 1 32 To convert from Fahrenheit to Celsius, use the formula: 5 C 5 (F 2 32) 9

Fahrenheit (F) The basic unit of measurement for temperature in the U.S. customary system. Celsius (C) The basic unit of
measurement for temperature in the metric system.

EXAMPLE

EXAMPLE
How many degrees Fahrenheit is 38.5 Celsius?
SOLUTION STRATEGY

To convert from Celsius to Fahrenheit use the formula: F 5 1.8C 1 32 F 5 1.8(38.5) 1 32 F 5 69.3 1 32 F 5 101.3

EXAMPLE

EXAMPLE
How many degrees Celsius is 302 Fahrenheit?
SOLUTION STRATEGY

To convert from Fahrenheit to Celsius use the formula: 5 C 5 (F 2 32) 9 5 C 5 (302 2 32) 9 5 C 5 (270) 9 C 5 150

Section III: Currency Conversion

13

EXERCISES
25. 50C 5 ____________ F 26. 140F 5 ____________ C

TRY IT

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17.

Currency Conversion

United States dollars are legal currency, or money, only in the United States. International investment, travel, and trade require that dollars be exchanged for foreign currency. Price quotations of international transactions are generally expressed in the seller companys national currency. U.S. exports, for example, are quoted in U.S. dollars ($); British exports are quoted in pounds (); German exports in marks (DM), and so on. A Japanese company purchasing goods from an American company would have to exchange Japanese yen () for U.S. dollars before purchasing the goods. Most countries have their own monetary system and currency. Each countrys money acts as a medium of exchange and a standard of value for its goods, services, and assets. The exchange rate of a currency is its legally established value expressed in terms of another countrys currency. For example, if it takes 117 Japanese yen to purchase 1 U.S. dollar, this would be written as: 117 to $1 U.S. Until 1973, exchange rates between currencies from around the world were fixed at a specified amount. Fixed rates made international currency exchanges quite routine, but did not reflect the economic and political events and pressures occurring daily around the world. Today we have a system known as floating exchange rates in which rates are allowed to vary on a daily basis among major currencies. Floating exchange rates are a particular threat to companies entering into international agreements that may take two or three months or even longer to complete. From the time the contract is signed to the time the goods are delivered there is transaction exposure. When the home currency is weak against the other currency of the transaction, the company whose currency is being exchanged is at risk of incurring exchange rate losses. On the other hand, when the home currency is strong against the other currency, extra gains could be realized. As an inducement to closing a sale, sellers sometimes agree to do business in the buyers national currency, thus shifting the exposure to rate changes from the buyer to the seller. Lets look at an example of how exchange rate fluctuations affect a transaction. A U.S. company places an order for machine parts from a firm in Japan. It is agreed that the transaction price will be 10,000,000 Japanese yen. At the time the order was written the exchange rate was .0085 dollars per yen. The U.S. import manager calculated that the order would cost $85,000. 10,000,000 yen 3 .0085 dollars per yen 5 $85,000 When the shipment arrived from Japan 60 days later and the payment was due, the exchange rate had changed to $.0088 per yen. It now took more of a dollar to purchase a yen. The dollar is said to have weakened against the yen. The U.S. company would now have to spend $88,000 to purchase the 10,000,000 yen needed to pay the bill. 10,000,000 yen 3 .0088 dollars per yen 5 $88,000 If on the other hand, the value of the dollar had strengthened to say $.0082, then less of a dollar is necessary to purchase each yen. The U.S. company would have to pay only $82,000 for the order. 10,000,000 yen 3 .0082 dollars per yen 5 $82,000

currency, or money A countrys

legally established medium of exchange and a standard of value for its goods, services, and assets.

22

SECTION III

exchange rate A currencys value expressed in terms of another countrys currency.

floating exchange rate Todays worldwide exchange rate system in which rates are allowed to vary on a daily basis among major currencies. transaction exposure In international trade, the time period between the signing of the contract and the delivery of the goods, in which importers and exporters are exposed to the rise and fall of currency exchange rates.

EVERYBODYS BUSINESS
Real-World Connection In 1999, European economic and monetary union, (EMU) officially began. Eleven countries: Germany, France, Italy, Spain, Belgium, the Netherlands, Luxembourg, Ireland, Finland, Portugal and Austria have signed on. It is predicted that Denmark, Sweden, the United Kingdom and Greece will follow early in the new century. The exchange rates of all of their currencies have been permanently fixed into a new common currency known as the euro. The latest currency exchange rates can be found at: www.x-rates.com.

14

Chapter 22: Business Measurements and Currency Conversion

forward contract A means of

reducing the risk of transaction exposure, whereby the importer and exporter agree to exchange currencies on a specified date in the future, at a price agreed upon today.

spot market Todays currency exchange rate, or cost of money. forward market The currency exchange rate, or cost of money, on a specified date in the future, usually 30, 90, or 180 days.

Successfully managing currency risk is very important to companies engaged in international trade. With todays global marketplace and intense competition, a company cannot simply pass the added cost of foreign exchange losses on to the customer as higher prices. When the delivery time of an order is over 30 days, a forward contract can be used to reduce the risk of losses. A forward contract is an agreement between the exporter and the importer to exchange currencies on a specified date in the future, at a price agreed upon today. These contracts can be written for 30, 90, or 180 days into the future. The cost of a forward contract is the difference between the cost of the spot market, todays cost of money, and the cost of the forward market. These contracts are arranged by international banks and brokerage houses around the world.

22-10

CONVERTING FOREIGN CURRENCY TO U.S. DOLLARS AND U.S. DOLLARS TO FOREIGN CURRENCY
Billions of dollars, in over 50 foreign currencies, are exchanged in world trade and investment each day. Currency exchange rate tables are published daily in the business section of most major newspapers. As an example, lets take a column-by-column look at a typical days listing for the United Kingdom (U.K.). Exhibit 1 is such a table, reprinted from The Wall Street Journal. Column 1 U.K. (pound)This column lists the countries in alphabetical order followed by the name of each currency in parentheses. For U.K., 1-, 2-, and 3-month forward contracts are also listed. U.S. $ equivalentThese columns list the exchange rates for the past two days expressed as U.S. dollars per unit of foreign currency. MonMonday it took 1.8291 U.S. dollars to purchase one U.K pound. FriFriday it took 1.8334 U.S. dollars to purchase one U.K. pound. Note: Because it required fewer dollars on Monday than on Friday to purchase a pound, the U.S. dollar is said to have strengthened against the U.K. pound. Currency per U.S. $These columns list the exchange rates for the past two days expressed as units of foreign currency per U.S. dollar. MonMonday it took .5467 pounds to purchase one U.S. dollar. FriFriday it took .5454 pounds to purchase one U.S. dollar. Note: Because it took more pounds on Monday than on Friday to purchase a U.S. dollar, the U.K. pound is said to have weakened against the U.S. dollar.

Columns 2 & 3 Column 2 Column 3

Columns 4 & 5 Column 4 Column 5

STEPS

STEPS TO CONVERT. CURRENCY USING THE EXCHANGE RATES TABLE:

A. Foreign Currency to U.S. Dollars:

Step 1. Locate the exchange rate listed in Column 2, U.S. $ equiv., for the country in
question.

Step 2. Multiply the number of units of foreign currency by the exchange rate for that
currency. U.S. dollars 5 Units of foreign currency 3 Exchange rate B. U.S. Dollars to Foreign Currency:

Step 1. Locate the exchange rate listed in Column 4, currency per U.S. $, for the country in question.

Section III: Currency Conversion

15

July 5, 2004 The foreign exchange mid-range rates below apply to trading among banks in amounts of $1 million and more, as quated at 4 p.m. eastern time by Reuters and other sources. Retail transactions provided fewer units of foreign currency per dollar. CURRENCY PER U.S. $ Mon. Fri. 2.9464 2.9464 1.4037 1.4021 .3770 .3770 3.0230 3.0386 1.3266 1.3242 1.3275 1.3250 1.3286 1.3261 1.3296 1.3271 628.93 630.12 8.2781 8.2781 2669.51 2670.23 25.900 6.0533 1.0000 6.1950 7.8003 203.75 45.809 9149 4.4723 109.12 108.98 108.68 108.12 .7090 .2948 1514.00 3.7994 .3474 25.813 6.0350 1.0000 6.2201 7.8003 203.54 45.704 9132 4.4723 108.37 108.24 107.93 107..37 .7090 .2948 1514.00 3.7994 3465

Exchange Rates

Country Argentina (Peso)-y Australia (Dollar) Bahrain (Dinar) Brazil (Real) Canada (Dollar) 1-month forward 3-months forward 6-months forward Chile (Peso) China (Renminbi) Colombia (Peso) Czech Rep. (Koruna) Commercial rate Denmark (Krone) Ecuador (US Dollar) Egypt (Pound)-y Hong Kong (Dollar) Hungary (Forint) India (Rupee) Indonesia (Rupiah) Israel (Shekel) Japan (Yen) 1-month forward 3-months forward 6-months forward Jordan (Dinar) Kuwait (Dinar) Lebanon (Pound) Malaysia (Ringgit)-b Malta (Lira)

U.S. $ EQUIVALENT Mon. Fri. .3394 .3394 .7124 .7132 2.6526 2.6526 3308 .3291 .7538 .7552 .7533 .7547 .7527 .7541 .7521 .7535 .001590 .001587 .1208 .1208 .0003746 .0003745 .03861 .1652 1.0000 .1614 .1282 .004908 .02183 .0001093 .2236 0009164 0009176 0009201 0009249 1.4104 3.3921 .0006605 .2632 2.8786 .03874 .1657 1.0000 .1608 .1282 .004913 .02188 .0001095 .2236 .009228 .009239 .009265 .009314 1.4104 3.3921 .0006605 .2632 2.8862

Country Mexico (Peso) Floating rate .0873 .0874 New Zealand (Dollar) .6476 .6475 Norway (Krone) .1448 .1448 Pakistan (Rupee) .01719 .01714 Peru (new Sol) .2883 .2883 Philippines (Peso) .01793 .01790 Poland (Zloty) .2714 .2721 Russia (Ruble)-a .03444 .03447 Saudi Arabia (Riyal) .2667 .2667 Singapore (Dollar) .5828 .5843 Slovak Rep (Koruna) .03087 .03096 South Africa (Rand) .1617 .1635 South Korea (Won) .0008675 .0008662 Sweden (Krona) .1336 .1341 Switzerland (Franc) .8085 .8113 1-month forward .8092 .8120 3-months forward .8108 .8135 6-months forward .8132 .8159 Taiwan (Dollar) .02966 .02981 Thailand (Baht) .02453 .02459 Turkey (Lira) .00000069 .00000069 U.K. (Pound) 1.8291 1.8334 1-month forward .1.8237 1.8284 3-months forward 1.8144 1.8188 6-months forward 1.8008 1.8052 United Arab (Dirham) .2723 .2723 Uruguay (Peso) Financial .03390 .03380 Venezuela (Bolivar) .000521 .000521 SDR Euro 1.4688 1.2283 1.4688 1.2321

U.S. $ EQUIVALENT Mon. Fri.

CURRENCY PER U.S. $ Mon. Fri. 11.4495 1.5442 6.9.061 58.173 3.4686 55.772 3.6846 29.036 3.7495 1.7159 32.394 6.1843 1152.74 7.4850 1.2369 1.2358 1.2333 1.2297 33.715 40.766 1449275 .5467 .5483 .5511 .5553 3.6724 29.499 1919.39 .6808 .8141 11.4482 1.5444 6.9.061 58.343 3.4686 55.866 3.6751 29.011 3.7495 1.7114 32.300 6.1162 1154.47 7.4571 1.2326 1.2315 1.2293 1.2256 33.546 40.766 1449275 .5454 .5469 .5498 .5547 3.6724 29.586 1919.39 .6808 .8116

Exhibit 1 Currency Exchange Rates

Special Drawing Rights (SDR) are based on exchange rates for the U.S., British, European, and Japanese currencies. Source: International Monetary Fund a-Russian Central Bank rate. b- Government rate. y-Floating rate.

Step 2. Multiply the number of dollars by the exchange rate for that currency:
Foreign currency 5 U.S. dollars 3 Exchange rate

EXAMPLE
A Dallas, Texas, importer received an order of merchandise from Mexico with a purchase price of 75,000 pesos. Using Fridays exchange rate, how many U.S. dollars will be needed to pay the bill?
SOLUTION STRATEGY

EXAMPLE

Pesos to U.S. dollars: From Column 3 of the table, we find the exchange rate for Friday to be .0874 dollars per peso. U.S. dollars 5 Units of foreign currency 3 Exchange rate U.S. dollars 5 75,000 3 .0874 5 $6,555.00

EXAMPLE
A New Jersey exporter sold goods valued at $100,000 to a company in Switzerland. The transaction will take place in Swiss currency, using a 1-month forward contract. Use Mondays exchange rate to calculate the price quotation in francs.
SOLUTION STRATEGY

EXAMPLE

U.S. dollars to French francs1-month forward: From Column 4 of the table, we find the 1-month forward exchange rate for Monday to be 1.2358 francs per dollar. Swiss francs 5 U.S. dollars 3 Exchange rate Swiss francs 5 100,000 3 1.2358 5 123,580 francs in 1 month

16

Chapter 22: Business Measurements and Currency Conversion

TRY IT

EXERCISE 27. You are the sales manager of a company that sells motor parts in many countries. You
are going on a selling trip to Brazil next week. Your airline fare and hotel bill will be charged on company credit cards. Your company has allotted an additional $2,000 for out-of-pocket expenses during your stay. Using Fridays listings: a. How many Brazilian real will you have for the trip? b. Upon returning to the United States, you still have 1,500 real. At the airport you convert them back to dollars. How many dollars will you receive?

CHECK

YOUR

ANSWERS

WITH

THE

SOLUTIONS

ON

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17.

TRY IT

EXERCISE: SOLUTIONS FOR CHAPTER 22

feet 105 5 yards 5 5 35 yd 3 3 inches 156 5 feet 5 5 13 ft 12 12 35,000 feet 5 miles 5 5 6.6 miles 5,280 5,280 sq inches 144 5 sq feet 5 540 5 3.75 sq ft 144

1. 2. 3. 4.

5. acres 3 4,840 5 sq yard 5 5 3 4,840 5 24,200 sq yd 6. 7. 5,696 acres 5 sq miles 5 5 8.9 sq mi 640 640 fl ounces 80 5 pints 5 5 5 pints 16 16

8. pecks 3 8 5 quarts 5 12 3 8 5 96 qt 9. a. bushels 3 4 5 pecks 5 1 3 4 5 4 pecks pecks 3 8 5 quarts 5 4 3 8 5 32 qt quarts 3 2 5 pints 5 32 3 2 5 64 pints in a bushel sales 5 64 pints 3 1. 19 5 $76.16 cost of merchandise 2 45.00 $31.16 gross profit

b.

10.

ounces 48 5 pounds 5 5 3 lb 16 16

11. pounds 3 16 5 ounces 5 4 3 16 5 64 oz 12. ounces 88 1 5 pounds 5 5 5 pounds 5 5 lb 8 oz 16 16 2 John: 173 lb 12 oz 2 5 lb 8 oz 168 lb 4 oz 5 Sams weight 72 hours 5 days 5 5 3 days 24 24

13.

14. minutes 3 60 5 seconds 5 2.5 3 60 5 150 sec

Try-It Exercise Solutions

17

15.

1 months 66 5 years 5 5 5 years 2 24 12

16. centimeters to meters 5 2 places left 32 cm 5 .32 meters 17. kilograms to grams 5 3 places right 12.5 kg 5 12,500 grams 18. liters to milliliters 5 3 places right 6.7 l 5 6,700 milliliters 19. hectares 3 10,000 5 sq meters 5 16.5 3 10,000 5 165,000 sq meters 20. 2,690 ares 5 hectares 5 5 26.9 hectares 100 100

21. pounds 3 .4536 5 kilograms 5 69 3 .4536 5 31.3 kg 22. sq meters 3 10.764 5 sq feet 5 800 3 10.764 5 8,611.2 sq ft 23. meters 3 39.37 5 inches 5 15 3 39.37 5 590.6 inches 24. liters 3 .9081 5 quarts (dry) 5 30 3 .9081 5 27.2 qts 25. F F F F 5 1.8C 1 32 5 1.8(50) 1 32 5 90 1 32 5 122

5 26. C 5 (F 2 32) 9 5 C 5 (140 2 32) 9 5 C 5 (108) 9 60 27. a. b. Foreign currency 5 U.S. dollars 3 Exchange rate Foreign currency 5 2,000 3 3.0386 5 6,077.2 real U.S. dollars 5 Foreign currency 3 Exchange rate U.S. dollars 5 1,500 3 .3291 5 $493.65