Aim

The aim of this game is to play the part of a currency trader and to trade different currencies to increase the value of your currency holding.

You will be given an imaginary starting sum of US$5 million and your task is to use the currency market to trade your balance to make this as large a sum as possible by transferring it between different currencies. Your teacher/lecturer will establish a period of time during which you will be allowed to trade and at the end of that period all currency portfolios will be transferred back to US dollars and the student whose portfolio is worth the most will be the winner.

The Game

You should use your knowledge of business and economics to change your $5 million into a variety of different currencies. Your portfolio should consist of no less than 4 different currencies at any one time and should be drawn only from the list of currencies below.

Image copyright: Marcus Jump, stock.xchng

You are advised to check your portfolio regularly - currencies change every day! You will also need to keep a check on the decisions you have made and write down a short summary of your reasons for making these decisions. You must do this even if you decide not to change your portfolio.

The reasoning behind these instructions is to encourage you to think about the factors affecting changes in currencies and what you predict might happen as a result of changes that occur in the world and as a result the currency markets. You are advised to change your portfolio up to three times a week and to keep a record of the changes when they are made.

You should hand in your record sheet to your teacher/lecturer at the end of each week or email the sheet to him/her. Below is an example of how to calculate changes in exchange rates and also a link to Biz/ed's interactive interest rate transmission mechanism which provides an animated explanation of the effect of changing exchange rates.

Changing Currencies

If the exchange rate is currently $1 = £0.55, to change $500,000 dollars into pounds multiply 500,000 by 0.55 (£275,000).

To convert £450,000 to euro at a rate of €1 = £1.67, divide 900,000 by 1.67 (€269,461).

You might wish to brush up on your numeracy skills by doing the calculations yourself but there are now a number of Web sites where you can get a currency converter to do the job for you. Links are available below to two of the most popular, but all converters fulfil the same task:

• The Economist (http://www.economist.com/markets/currency/fullconverter.cfm)
• Yahoo Finance (http://uk.finance.yahoo.com/m3?u)

Below is an example of a currency transaction based on transferring Australian Dollars to Thai Baht.

The intention, don't forget, is to grow your initial sum to as high a level as possible through your transactions. Basically, you are aiming to buy at one price and sell at a higher price. It is based on this simple principle but it is a lot more involved than this because you are dealing with a variety of different currencies.

The example below gives you a flavour of what you must do to make sure your portfolio grows. Assume the exchange rate between the Pound Sterling, the US Dollar and the Indian Rupee are as follows:

Let's assume you start with £250,000. The exchange rate between the pound and the dollar appreciates - £1 is now worth more in terms of dollars. The exchange rate rises to £1 = $1.82. You sell your pounds and buy dollars. You will now have 250,000 x $1.82 ($455,000).

You then notice that the exchange rate between the rupee and the dollar is changing. The dollar depreciates against the rupee so you decide to transfer your dollars into rupees at a rate of $1 = INR 84. You now have 38,220,000 rupees.

You then see that the rupee is depreciating against the pound so transfer your rupees back to pounds at a rate of INR1 = £0.011. You now have £420,420.

See it's that easy! In reality of course the changes between currencies may be very small from day to day but you have a sufficiently large initial sum to be able to make some headway in the foreign exchange market.

How Do You Make Your Decisions?

The aim of the game is to encourage you to:

• Put into practice the knowledge and theory learnt on exchange rates
• To get some idea of how and when currencies might move
• Do some research into the countries whose currencies you hold and those which you are thinking of buying

For example, announcements about government policy might impact on exchange rates, as will potential changes in interest rates. If there are news reports that the European Central Bank is concerned about the lack of economic growth in the eurozone that might signal that interest rates may be about to fall which will be likely to affect the exchange rate. The Bank of England's Monetary Policy Committee might report that it is concerned about an increase in inflationary pressures - that might signal a possible rise in interest rates again affecting the exchange rate.

Basically, if you think the exchange rate of the country you are holding is about to fall - then sell before it does. If you think it is going to rise then buy! The following links will provide you with some additional help:

• Interactive interest rate transmission mechanism - from Biz/ed (http://www.bized.co.uk/learn/economics/govpol/macropolicies/interest/exchange/index.htm)
• Forex (http://www.forex.com/)
• Currency converter - from The Economist (http://www.economist.com/markets/currency/)
• Currency markets - from the Financial Times (http://www.ft.com/markets/currencies)
• Market data - from the BBC (http://newsvote.bbc.co.uk/1/shared/fds/hi/business/market_data/currency/default.stm)

How to Fill Out the Currency Trading Form

Currency trading form templates:

• HTML version
• Word version