International Business Exam 1
Suppose the following represent a dealer's bid-ask quotes on exchanges between the US dollar (USD) and the South African rand (currency code: ZAR). Quote A: 13.9430 ZAR/ USD Quote B: 13.5738 ZAR/ USD What is the dealer's ask on the South African rand?
$ 0.0737/ZAR
The exchange rate between the USD and the Japanese yen 101 in September of 2020 was 101 JPY = 1 USD. Your company owes a JPY 216,973,002 payable in one month. At the exchange rate above, how much will you pay in dollars? Round to 5 decimal places in your work. Round to the nearest dollar in your answer. Do not include the dollar sign in your answer.
$2,148,248
During 1995, the yen went from $0.0125 to $0.0095238. By how much did the dollar appreciate against the yen? a. 23.81% b. 31.25% c. 15.67% d. 40.78% e. None of the above
1/$.0125= 80yen/$ 1/.0095238= 105yen/$ (per dollar so $ must be in the denominator) b. 105-80/80= 31.25%
1. Evaluate the following as true or false. The domestic financial manager must be knowledgeable in several areas within finance, whereas the multinational financial manager usually specializes in a single area, such as corporate finance, investments, or financial markets
False. The multinational financial manager is likely to require knowledge of several fields within finance.
18. What BOP account does the portfolio income account belong to?
Financial
The U.S. and Argentina are trading partners. Which of the following will decrease (shift left) the demand for the Argentine peso, holding all else equal?
Higher relative inflation in Argentina.
11. What sort of activities result in debits to the foreign direct investment category of the US balance of payments? Give some examples from the book or notes.
Purchases by US entities of foreign ownership shares, foreign firms, real estate. Examples will vary.
9. What sort of activities result in debits to the services category of the US balance of payments? Give some examples from the book or notes.
Purchases by US entities of services from other countries. Examples will vary.
12. What sort of activities result in credits to the portfolio investment category of the US balance of payments? Give some examples from the book or notes.
Purchases by foreign entities of US financial assets such as stock, stocks ,bonds, and derivatives that do not involve a transfer of control. Examples will vary.
13. According to your book's presentation of the BOP categories, what sort of activities result in debits to Switzerland's official reserves account? Why?
Purchases of foreign currency, gold, SDR's by Switzerland's Central Bank. Examples will vary.
8. What sort of activities result in credits to the trade category of the US balance of payments? Give some examples from the book or notes.
Sales of US manufactured goods to entities in other countries. Examples will vary.
1. The Czech koruna (CZK) spot rate is CZK36.02/$. a. A 20 percent depreciation of the koruna will result in what new CZK/$ spot rate? b. If the koruna depreciates by 20 percent, by how much does the dollar appreciate?
a. Since it is the Czech koruna that has depreciated, it is most convenient to place the koruna in the denominator of the foreign exchange quote; CZK36.02/$ = $0.02776/CZK. A 20% depreciation of the koruna results in: = ($0.02776/CZK)(0.80) = $0.02221/CZK, or CZK45.03/$. b. To find the dollar appreciation, it is most convenient to use a CZK/$ quote. The dollar appreciates by (45.03-36.02)/36.02 = 25%
On February 1, the euro is worth $1.2966. By May 1, it has moved to $1.3634. a. By what percent has the euro appreciated or depreciated against the dollar during this 3-month period? b. By what percent has the dollar appreciated or depreciated against the euro during this period?
a. Since the euro is now worth more in dollar terms, it has appreciated against the dollar. The amount of euro appreciation is (1.3634 - 1.2966)/1.2966 = 5.15%. b. The flip side of euro appreciation is dollar depreciation. The dollar has depreciated by an amount equal to [(1/1.3634) - (1/1.2966)]/(1/1.2966) = -4.9%
11. Define each of the following types of foreign exchange transactions and give an example. -Spot - Outright forward
a. Spot transactions: The purchase of foreign exchange with delivery and payment between banks to take place, normally, on the second following business day. b. Outright forward transactions (forwards): Contracts for delivery at a future value date of a specified amount of one currency for a specified amount of another currency (thus an exchange rate is determined). a. "Value date" is the date of settlement. b. Typically: 1,2,3,6,12 months c. "Buying forward" d. "Selling forward"
19. What makes the BOP an "identity"?
When the accounts are recorded correctly, the combined balance of the current account, the capital account, the financial account, and the reserves account, must be zero. See the note for the equation. Under the pure flexible exchange rate regime, central banks will not intervene in the foreign exchange markets, and central banks do not need to maintain official reserves. In this case, the sum of the rest of the accounts is zero.
In 2002, one dollar bought ¥125. In 2006 it bought about ¥115. a. What was the dollar value of the yen in 2002? What was the yen's dollar value in 2006? b. By what percent has the yen risen in value between 2002 and 2006? c. By what percent has the dollar fallen in value between 2002 and 2006?
a. The dollar value of the yen in 2002 was $0.008 (1/125). By 2006, the yen had risen to $0.0087. b. Between 2002 and 2006, the yen rose by 8.8%, calculated as (0.0087 - 0.008)/0.008. c. During this same period, the dollar depreciated by 8%, calculated as (115 - 125)/125.
On March 29, 2007, the Indian rupee was worth $0.023270. The next day, it was worth $0.022980. a. By how much had the rupee depreciated against the dollar? b. By how much had the dollar appreciated against the rupee?
a. The rupee devalued by (0.02298 - 0.02327)/0.02327, or -1.25%. b. The dollar appreciated against the rupee by [(1/0.02298) - (1/0.02327)]/(1/0.02327), or 1.28%.
In early August 2002 (the exact date is a state secret), North Korea reduced the official value of the won from $0.465 to $0.0067. The black market value of the won was $0.005 at the time. a. By what percentage did the won devalue? b. Following the initial devaluation, what further percentage devaluation would be necessary for the won to equal its black market value?
a. The won devalued ($0.067-$0.465)/$0.465) = 98.56% b. (0.005-0.0067)/0.0067 = 25.4%
4. In class, the following example was given. Suppose the foreign exchange market is made up of only 2 trading partners, the U.S. and the euro area. Determine the effect on the equilibrium exchange rate in the market for euros of the following changes. Repeat the example, only this time considering the market for dollars. a. Suppose the price level in the U.S. were to increase by 20% while the average price level in the euro area remained unchanged. b. Suppose that interest rates increase in the United States, while remaining unchanged in the euro area.
a. U.S. goods are now relatively more expensive compared to European goods. This decreases demand by Europeans for U.S. goods and decreases the demand for dollars (shifts left to Da). This also increases American's desire for imports, and therefore, increases the supply of dollars (shifts right to Sa). Both of these factors drive the exchange rate of €/$ downward. This means the dollar depreciates against the euro b. U.S. securities now offer a relatively higher return compared to euro-denominated securities. This means Europeans and Americans both desire to hold relatively more U.S. securities and less euro-denominated securities. This means Europeans need more dollars and Americans need fewer euros. So the demand for dollars by Europeans increases (shifts right to Dc) and the supply of dollars by Americans decreases (shifts left to Sc). The dollar appreciates against the euro.
15. Which of the following will decrease (shift left) the demand for Swiss francs a. higher inflation in Switzerland b. lower U.S. interest rates c. U.S. incomes rise d. Appreciation of the Swiss franc e. Depreciation of the Swiss franc
a. higher inflation in Switzerland
10. When foreigners decide to purchase additional U.S. government bonds, ____. a. the demand for dollars rises b. the federal government budget deficit declines c. the supply of dollars rises d. the trade deficit declines e. None of the above
a. the demand for dollars rises
The emergence of global financial markets is due in no small part to
advances in computer and telecommunications technology.
6. The forward market a. involves contracting today for the future purchase or sale of foreign exchange at the spot rate that will prevail at the maturity of the contract. b. involves contracting today for the future purchase of sale of foreign exchange at a price agreed upon today. c. involves contracting today for the right but not obligation to the future purchase of sale of foreign exchange at a price agreed upon today. d. none of the above
b
4. The ____ of the IMF's Balance-of-Payments Statistics measures cross-border transactions associated with changes in ownership of financial assets and liabilities. a. current account b. financial account c. overall balance d. trade balance e. None of the above
b.
7. Opportunities for MNCs to create value to their operations through their financial policies include each of the following except ______. a. access to low-cost capital b. currency risk management c. expansion of the investment opportunity set d. financial market arbitrage e. overcoming capital flow barriers
d.
9. A major advantage of floating exchange rates is a. the need to adjust domestic monetary and fiscal policy whenever a change occurs in international markets b. their inability to deal with changing domestic prices c. export expansion failure that accompanies depreciations in the nation's currency. d. the instability it creates for those involved in international trade and finance. e. that they are determined by market forces like any other price
e.
On August 1, 2006, Zimbabwe changed the value of the Zim dollar from Z$101/US$ to Z$250/US$. a. What was the original US dollar value of the Zim dollar? b. By what percent has the Zim dollar devalued (or revalued) relative to the US dollar? c. By what percent has the US dollar appreciated (or depreciated) relative to the US dollar?
a. The U.S. dollar value of the Zim dollar prior to devaluation was $0.0099 (1/101). Subsequent to devaluation, the Zim dollar was worth $0.004 (1/250). b. The U.S. dollar value of the Zim dollar has changed by (0.004 - 0.0099)/0.0099 = -59.6%. Thus, the Zim dollar has devalued by 59.6% against the U.S. dollar.c. 147.5%
13. If the price level in Mexico falls relative to the U.S. price level, which of the following is correct? a. demand for pesos increases (shifts right) b. supply of pesos decreases (shifts left) c. demand for dollars decreases (shifts left) d. supply of dollars increases (shifts right) e. all of the above
e. explanation: If the price level in Mexico falls relative to the U.S. then Mexican imports become more attractive to Americans and they demand more pesos (which means the supply of dollars increases). At the same time, American exports become relatively more expensive to Mexicans and they demand fewer dollars (supply of pesos decreases).
In the mid 1990s, Mexico faced a currency crisis. It's currency, the peso, changed from fixed to floating. As a result, corporations that owed dollar-debt found that the domestic cost of servicing the debt rose by nearly 60%. This is an example of
exchange rate risk faced by multinational corporations.
15. What BOP account does the foreign direct investment category belong to?
financial account
12. Given the following exchange rates Mexican peso: MXN 10.974/$ Japanese yen: ¥117.29/$ Calculate the cross rate between the peso and the yen.
¥ 10.69/MXN
Credit Suisse First Boston (CSFB) quotes the following rates for the U.S. dollar (note: forward rates are just rates contracted for an exchange in the future, whereas the spot rate is a rate on a given day and the question is focusing on converting bid and ask rates on different currencies) Bid (€/$) Ask (€/$) Spot rate 0.8894 0.8898 1-month forward 0.8938 0.8942 3-month forward 0.9028 0.9032 6-month forward 0.9164 0.9168 12-month forward 0.9443 0.9447 Convert these to $/€ quotes for the euro—be careful with your bid and ask labels! What would you receive from CSFB if you sold $10 million at the 6-month forward rate? What would you pay CSFB if you bought €10 million at the 12-month forward rate?
1st € Bid in $/€ 2nd € Ask in $/€ Spot rate $1.1238 $1.1244 1-month forward $1.1183 $1.1188 3-month forward $1.1072 $1.1077 6-month forward $1.0908 $1.0912 12-month forward $1.0585 $1.0590 CSFB is buying dollars at their dollar bid price, so you will receive (€0.9164/$) x ($10 million) = €9,164,000CSFB is selling euros and hence buying dollars. CSFB's ask price on the euro is $1.05899/Є (bid price is $1.05854/Є). Therefore, you will pay $10,590,000 for 10 million euros.
The current exchange rate between the US dollar and Mexican peso (MXN) is 20.86 = 1 USD. If you pay 90 pesos for a meal in Mexico City, how many dollars did the meal cost? Answer to the nearest cent and do not include the dollar sign in your response.
4.31
20. What are some problems with making bilateral comparisons between two countries' BOP accounts?
A disadvantage I feel is it does not give credit when credit is deserved. Materials are coming from all over the world to be put together to build the iPhone. Bilateral transactions do not compare well. Trade deficits are not reliable of economic health. The article states that when the U.S. dollar rises or falls the trade balance fluctuates. This means any exchange rate shift, inflation or investing and savings has an effect. The BOP can help inform us on the imports and exports in relation to countries, but trade deficits are not a strong measure to be using for an economy.
13. Suppose the spot rate on the British pound is $1.8410/£ and the one-month and three-month forward rates are given below One-month $1.8360/£ Six-month $1.8120/£ a. Calculate the one-month forward discount or premium on the pound. b. Calculate the six-month forward discount or premium on the dollar (hint: first convert to a direct quote on the dollar).
A. [(1.8360-.18410)/1.8410]*[360/30] = - 0.0326 = 3.26% discount B. [(0.5519-0.5432)/0.5432]*[360/180] = .0320 = 3.2% premium
The U.S. and Brazil are trading partners. Consider the market for foreign exchange between the USD and the Brazilian real (BRL). Which of the following is likely to increase demand for the BRL all else equal?
All of the other answers would increase demand for the BRL, all else equal.
Between 2021 and 2022, the exchange rate between the euro and the dollar changed from 1.17 USD = 1 EUR to 1.01 USD = 1 EUR. Which of the following describes a likely result of this exchange rate change?
American tourists purchase larger quantities of euros.
Recent changes in globalization trends since 2020 include
An increase in regional supply chains as opposed to wider-ranging global supply chains.
What is the Bretton Woods system?
An international monetary system introduced just after WWII, based on exchange rates fixed against the USD.
Suppose you start with $100 and buy stock for 50 pounds (GBP) when the exchange rate is 1 GBP = 2 USD. One year later the stock rises to GBP 60. You are happy with your 20 percent return on the stock, but when you sell the stock and exchange your GBP 60 for dollars, you only get $45 since the pound has fallen to 1 GBP = $0.75. This loss of value is an example of:
Exchange rate risk
5. The ____ of the IMF's Balance-of-Payments Statistics measures the sum of all private financial and economic transactions of the reporting economy with the rest of the world. a. current account b. financial account c. overall balance d. trade balance e. None of the above
C
According to a Wall Street Journal article published in September of 2018, "The Bank of Russia [Russia's central bank] raised its key interest rate to 7.5% from 7.25%, ending a series of cuts." Assuming: Other conditions (such as inflation rates, risk, etc.) in Russia are unchanged over this period. Interest rates, inflation and other conditions in the US remain steady over this period. All else is held constant. Consider the market for foreign exchange between the US and Russia. Which of the following is correct?
Demand for rubles increases because US investors purchase more Russian securities.
16. What BOP account does the services category belong to?
Current account
17. What BOP account does the primary income account belong to?
Current account
21. What is secondary income and what BOP account does it belong to?
Current transfers for which no goods services or assets are exchanged. They do not involve change of ownership, acquisition, or disposal of an asset.
According to a Wall Street Journal article from February of 2018 (not assigned as a required article), "Australia's government will harden rules on foreign investment in critical energy infrastructure and prime farmland." (In other words, Australia is going to limit foreigners' investment in Australia from its current level). Which of the following best describes the likely impact on the market for the Australian dollar?
Demand for the Australian dollar decreases because foreign companies will need to convert less of their currency into Australian dollars.
10. What sort of activities result in credits to the primary income category of the US balance of payment? Give some examples from the book or notes.
Dividends, interest payments, salaries, etc. paid to US entities from foreign entities. Examples will vary
What is a primary function of the European Central Bank?
Establish monetary policy and conduct open market operations for the euro area.
6. If capital markets were perfect, that is, capital could move freely across national borders, would MNC's still exist? Why or why not?
Even if capital moved freely across national borders, MNCs would still exist, because MNCs bring a host of firm-specific knowledge and advantages along with capital to the countries in which they operate. Such advantages may include unique products, processes, technologies, patents, specific rights, or specific knowledge and skills. These advantages can be used profitably in foreign markets. Moreover, MNCs are better able to apply the knowledge and skills gained in their prior operations in other countries to each new country that they enter. Thus, from the point of view of a country attracting foreign capital, the capital that is brought in by an MNC brings with it firm-specific advantages that yield better returns than the capital that is simply borrowed from a foreign country.
According to a September 2019 Wall Street Journal article, "Canada's annual inflation rate slowed in August." Assuming: Other conditions (such as real interest rates, risk, etc.) in Canada are unchanged over this period. Interest rates, inflation and other conditions in the US remain steady over this period. All else is held constant. Consider the market for foreign exchange between the US and Canada. Which of the following is correct?
Demand for Canadian dollars increases because Americans increase their imports from Canada.
According to an article from The Economist in July of 2022, "Most stockmarkets are in rough shape, corporate bonds have been pummeled and the cryptospshere is in the dumps. Pessimistic forecasters think much worse lies ahead . . . Investors trust that, whatever happens, they can wait out the storm in America's well-regulated, highly liquid money markets." Which of the following best describes the impact on the market for dollars?
Demand for dollars increases because foreign investors need dollars to purchase US "safe haven" assets.
On February 12, 2021, the Wall Street Journal reported that, "Bank of Mexico policy makers voted unanimously to cut the bank's key rate to its lowest level since mid-2016." Consider the market for foreign exchange between the US and Mexico, assuming: Other conditions (such as inflation rates, risk, etc.) in Mexico are unchanged over this period. Interest rates, inflation and other conditions in the US remain steady over this period. All else is held constant. Which of the following is correct?
Demand for pesos decreases because American investors buy fewer peso denominated securities.
How is international financial management different from domestic financial management?
International finance management is designed to provide today's financial managers with an understanding of the fundamental concepts and the tools necessary to be effective global managers. Banking Regulations The domestic financial management have to deal with banking rules and regulations of domestic country. There is more familiarity with banking rules and regulations The international financial management have to deal and follow the banking regulations of different countries Four major facets which differentiate international financial management from domestic financial management are an introduction of foreign currency, political risk, market imperfections, and enhanced opportunity set.
The U.S. and Brazil are trading partners. Holding all else constant, which of the following is expected to decrease the supply of Brazilian real in the foreign currency market?
Lower U.S. relative real interest rates
12. What is the European Central Bank and its role?
Monetary policy for the euro zone countries is now conducted by the European Central Bank (ECB) headquartered in Frankfurt, Germany, whose primary objective is to maintain price stability.
2. Suppose that the exchange rate of U.S. dollars in for British pounds was £0.5303/$ on August 22. What was the price of British pounds in terms of U.S. dollars on August 22?
On 8/22, the exchange rate on the British pound was $1.89/£
Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate. Explain why this may be so.
Once capital markets are integrated internationally, vast amounts of money may flow in and out of a country in a short time period. This will make it very difficult for the country to maintain a fixed exchange rate.
According to a Wall Street Journal article (not required reading) published in the fall of 2021, "The European Central Bank has indicated that it intends to keep financial conditions loose for the foreseeable future . . . In contrast, Federal Reserve officials have signaled they are on track to begin reversing their easy-money policies later this year." (This difference in policies will result in relative real interest rates falling in the euro area compared to the United States). Which of the following describes the impact on the supply of dollars in the foreign exchange market and the correct explanation for this impact?
Supply of dollars decreases in the foreign exchange market because investors will purchase fewer euro-denominated assets like German bonds, and therefore will convert fewer dollars into euros.
According to an August 2018 Wall Street Journal article, policy makers in Brazil "cut inflation from 9% . . . to 3% last year, the lowest level since 1998" Assuming Other conditions (such as inflation rates, risk, etc.) in Brazil are unchanged over this period. Interest rates, inflation and other conditions in the US remain steady over this period. All else is held constant. Consider the market for foreign exchange between the US and Brazil. Which of the following is correct?
Supply of the Brazilian real decreases as Brazilians import less from the US. Demand for the Brazilian real increases as Americans import more from Brazil. The US depreciates against the Brazilian real.
According to the Wall Street Journal, in March of 2020 the exchange rate between the Australian dollar (AUD) and the USD was USD 0.55 = 1 AUD. In September of 2020 that exchange rate had changed to USD 0.72 = 1 AUD. Which of the following best describes the change in the value of the Australian dollar against the U.S. dollar? Where applicable, round to FOUR decimal places in your work.
The AUD appreciated by 30.91% against the USD during this time period.
Which of the following is correct?
The IMF classifies the euro as floating freely against other currencies.
According to the Wall Street Journal, in September of 2020 the exchange rate between the USD and Australian dollar (AUD) was 0.72 USD = 1 AUD. By February of 2021 that rate had changed to 0.79 USD = 1 AUD. Which of the following best describes the change in the value of the US dollar against the Australian dollar? Where applicable, round to FOUR decimal places in your work.
The USD depreciated by 8.86% against the AUD during this time.
Discuss the advantages and disadvantages of the gold standard.
The advantages of the gold standard include: (I) since the supply of gold is restricted, countries cannot have high inflation; (2) any BOP disequilibrium can be corrected automatically through cross-border flows of gold. On the other hand, the main disadvantages of the gold standard are: (I) the world economy can be subject to deflationary pressure due to restricted supply of gold; (ii) the gold standard itself has no mechanism to enforce the rules of the game, and, as a result, countries may pursue economic policies (like de-monetization of gold) that are incompatible with the gold standard.
1. Why do economists and policy makers care that the U.S. has a large Balance of Trade deficit? Support your explanation with the class discussion including articles if applicable.
The article discusses international transactions as it discusses the current account includes the rise of export and the fall of import of goods and services. I would assume that the article keeps track or the credit and debit accounts of purchases to make conclusions on the numbers. There was more big-ticket items like travel that slowed imports. Bretton Woods was a result of the world bank. Trade deficits are not reliable of economic health. The article states that when the U.S. dollar rises or falls the trade balance fluctuates. This means any exchange rate shift, inflation or investing and savings has an effect. The BOP can help inform us on the imports and exports in relation to countries, but trade deficits are not a strong measure to be using for an economy.
5. A German automobile costs €70,000 if purchased in Frankfurt. You buy this car through a U.S. retailer when the exchange rate is .7821€/$. Assuming that transportation and other costs are zero, what does the German car cost you in U.S. dollars?
The car costs 70,000/.7821 or $89,502.62
The United States has experienced continuous current account deficits since the early 1980s. What do you think are the main causes for the deficits? What would be the consequences of continuous U.S. current account deficits?
The current account deficits of U.S. may be attributable to (i) the strong dollar and undervalued currencies of trading partners such as China, (ii) high consumption and low savings in the U.S., (iii) weak competitiveness of U.S. industries. If U.S. deficits continue, the dollar may eventually depreciate substantially and the confidence in dollar may suffer.
3. Suppose substantial amounts of people from around the world wish to view the Olympics in person and spend three weeks in the England doing so. While there, they also purchase millions of souvenirs for their family and friends left behind. All else constant, describe the effect this will have on the foreign exchange market for British pounds. Illustrate your discussion with a graph.
The large influx of foreigners into Britain increases the demand for British goods and services. So, in the market for British pounds there is an increase in demand for pounds. The demand curve shifts to the right and the equilibrium $/£ exchange rate increases.
what were the main objectives of the Bretton Woods system?
The main objectives of the Bretton Woods system were to achieve exchange rate stability and promote international trade and development.
Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate. Why?
The market forces may be stronger than the exchange rate intervention that the government can execute.
18. Suppose a currency trader sees the following quotes at Banks A, J, S. -Bank A: $0.009411/¥ -Bank J: CHF 0.016459 / ¥ -Bank S: CHF 1.7125 /$ How much profit can a trader who starts with $1,000,000 make through arbitrage (round to the nearest hundred)?
The quoted cross rate at Bank J is: CHF 0.016459 / ¥. Solve for an implied cross rate between the other two banks that you can compare to this. (CHF 1.7125 /$)*($0.009411/¥) = CHF 0.016163/¥ Notice that a yen buys more francs at Bank J compared to the cross rate. So, your goal becomes to buy francs with yen at Bank J. First you need yen (since you're starting with dollars)! -First, exchange $1,000,000 into ¥ 106,258,633.50 at Bank A. -Second, exchange ¥ 106,258,633.50 into CHF 1,748,910.85 at Bank J. -Third, exchange CHF 1,748,910.85 into $1,021,261.81 at Bank S.
17. Assume the following quotes: - Citibank quotes US dollars per pound at $1.8500/£ - National Westminster quotes euro per pound at €1.5000/£ - Deutsche Bank quotes dollars per euro at $1.2400/€ Calculate how a market trader with $1,000,000 can make an intermarket arbitrage profit.
The quoted cross rate is €1.5000/£ at National Westminster. Solve for an implied cross rate between the other two banks that you can compare to this.($1.8500/£)*(€/$1.2400) = €1.4919/£. The implied cross rate does not equal the quoted cross rate so arbitrage is possible.Comparing the quoted and implied cross rates, you find that a pound buys more euros at National Westminster's quoted cross rate. So, your goal becomes to buy euros with pounds at National Westminster. First you need pounds (since you're starting with dollars) - First, buy pounds at Citibank £540,540.50* -Second, buy euros at National Westminster: €810,810.81 -Third, buy dollars at Deutsche Bank: $1,005,405.40. The result is a profit of $5,405.40.
Comment on the following statement: "Since the United States imports more than it exports, it is necessary for the United States to import capital from foreign countries to finance its current account deficits"
The statement presupposes that the U.S. current account deficit causes its capital account surplus. In reality, the causality may be running in the opposite direction: U.S. capital account surplus may cause the country's current account deficit. Suppose foreigners find the U.S. a great place to invest and send their capital to the U.S., resulting in U.S. capital account surplus. This capital inflow will strengthen the dollar, hurting the U.S. export and encouraging imports from foreign countries, causing current account deficits.
Consider the market for foreign exchange between the US dollar (USD) and the Canadian dollar (CAD). Which of the following would cause the USD to appreciate?
The supply of USD decreases
19. Using the excerpt below, calculate the one-, three-, and six-month forward premium or discount for the Canadian dollar versus the U.S. dollar using American term quotations (see definition in the book). For simplicity, assume each moth has 30 days. What is the interpretation of your results? in US $ per US $Canada dollar 0.9629 1.0385 1-mos forward 0.9628 1.0386 3-mos forward 0.9624 1.0391 6-mos forward 0.9614 1.0401
This question is asking about the forward premium or discount on the Canadian dollar (in US dollars). F1= [(.9628 - .9629)/.9629] * (360/30) = -.0012 = 0.12% discount F3= [(.9624 - .9629)/.9629] * (360/90) = -.0021 = 0.21% discount F6= [(.9614 - .9629)/.9629] * (360/180) = -.0031 = 0.31% discount The Canadian dollar sells forward at a discount that becomes deeper over time. The implication is that the Canadian dollar is expected to depreciate against the U.S. dollar.
Banks find it necessary to accommodate their clients' needs to buy or sell FX forward, in many instances for hedging purposes. How can the bank eliminate the currency exposure it has created for itself by accommodating a client's forward transaction?
This questions is asking about the forward premium or discount on the USD (in British pounds). Solution: The formula we want to use is: [(.6943 - .6944)/.6944] x 360/30 = -.0017 f3,$ = [(.6941 - .6944)/.6944] x 360/90 = -.0017 f6,$ = [(.6937 - .6944)/.6944] x 360/180 = -.0020 The pattern of forward premia/discounts indicates that the dollar is trading at a discount versus the British pound. That is, it becomes less expensive to buy a dollar forward for British pounds (in absolute and percentage terms) the further into the future one contracts.
3. Credit Suisse First Boston (CSFB) quotes the following rates. For each quote, state which currency CSFB is buying and which currency CSFB is selling at the quoted rates. a. €0.8894/$ Bid and €0.8898/$ Ask b. €0.8898/$ Bid and €0.8894/$ Ask
Traders buy low and sell high. a. €0.8894/$ Bid and €0.8898/$ Ask. The amount of euros bid for dollars is lower and asked for dollars is higher so the currency CSFB is buying at the bid and selling at the ask is the dollar. b. €0.8898/$ Bid and €0.8894/$ Ask. The amount of euros to dollars in the bid is higher than in the ask price so CSFB. This must be a bid on the euro and an ask on the euro. Apply Rule #2 to check. The bid is $1.238/ € and the ask is $1.244/ €. Thus the trader is buying euros low at $1.238 and selling euros high at $1.244.
Credit Suisse First Boston (CSFB) quotes the following rates for the U.S. dollar. Bid (€/$) Ask (€/$) Spot rate 0.8894 -0.8898 1-month forward 0.8938- 0.8942 3-month forward 0.9028 -0.9032 6-month forward 0.9164 -0.9168 12-month forward 0.9443 -0.9447 16. What is the annualized 6-month forward premium or discount on the euro?
You need to determine the ask on the euro Spot = $1.1244 F6 = $1.0912 [(1.0912 - 1.1244)/1.1244]*[360/180] = - 0.0591 = 5.91% discount
Credit Suisse First Boston (CSFB) quotes the following rates for the U.S. dollar. Bid (€/$) Ask (€/$) Spot rate 0.8894 -0.8898 1-month forward 0.8938- 0.8942 3-month forward 0.9028 -0.9032 6-month forward 0.9164 -0.9168 12-month forward 0.9443 -0.9447 15. What is the annualized 3-month forward premium or discount on the dollar?
[(0.9032-0.8898)/0.8898]*[360/90] = 0.0602 = 6.02% premium
5. The spot market a. involves the almost-immediate purchase or sale of foreign exchange. b. involves the sale of futures, forwards, and options on foreign exchange. c. takes place only on the floor of a physical exchange. d. all of the above. e. none of the above
a
Use the following information to answer the next two questions. The dollar-euro exchange rate is quoted at Bank A as $1.00= €0.8334 and the dollar-pound exchange rate is quoted at Bank B as $1.00 = £0.5556. Bank C quotes you a rate of £1.00 = €1.50 4. How much money can an astute trader with $1,000,000 make from triangular arbitrage between Banks A, B, and C above? a. No triangular arbitrage is possible at the above rates. b. $1,600,000 c. $41,667 d. $40,000 e. none of the above is correct
a
10. Which of the following is one of the IMF's challenges? a. to ensure that the consequences of poor investment decisions are borne by investors and not by taxpayers. b. to leave a legacy of debt c. to encourage countries to use IMF loans to support the value of their currency d. all of the above e. none of the above
a.
3. The ____ of the IMF's Balance-of-Payments Statistics measures whether a particular country is a net importer or exporter of goods and services. a. current account b. financial account c. overall balance d. trade balance e. None of the above
a.
8. When a U.S. firm signed a contract to buy tractors at a cost of 200,000 rubles from Russia, a dollar cost 26.776 rubles. When the deal was finally completed and the invoice arrived, the firm was obliged to pay under an exchange rate of 32 rubles per dollar. We may conclude from this example that a. the firm was able to buy the tractors at a lower U.S. dollar cost, thus making additional profit b. the firm was forced to buy the tractors at a higher U.S. dollar cost, thus losing some or all of its profit c. this firm is not ready for the international phase of globalization d. the U.S. balance of payments is likely to fail to balance if the new exchange rate continues e. none of the above
a. The contract was for a cost of 200,000 rubles. When the contract was signed, the exchange rate of dollars to rubles was $0.0373/ruble and the cost in dollars per tractor would have been $7469.36. When the firm paid the bill, it was under an exchange rate of $0.03125/ruble and the cost in dollars was $6250.00.
14. All else equal, an appreciation in the US dollar relative to other currencies tends to a. increase U.S. imports b. increase U.S. exports c. demand for the dollar to increase d. occur when interest rates abroad are higher than those in the U.S. e. cause more foreigners to invest in U.S. securities
a. explanation: An appreciation in the U.S. dollar means it takes more of other countries' currencies to buy a dollar. This means that the price of American exports increases, which decreases the amount of the U.S. exports abroad
11. Describe the benefits and costs of a common currency such as the euro.
a. I think I am still skeptical that the euro area currency zone outweighs the costs, especially the costs associated with poorer less governed countries. There is no monetary policy independence, no common fiscal policy an no exchange rate independence. This can be a problem when a country slips into a recession and needs these facts to be changed or enforced to regain traction in their economy. b. But it Keeps transaction costs just among boarders. a. Trade deals (free trade), (but does have the transaction cost of converting money), and alliance, free travel are the top benefits from all EU members, even those who do not use the euro
12. If the equilibrium price of yen is $0.008/¥, but for some reason the market opens at $0.005/¥, it is likely that a. the Japanese demand for U.S. goods will increase, moving the foreign rate toward equilibrium b. the US purchases of Japanese goods will increase driving up the foreign exchange price of yen c. an excess supply of yen will force a decline in the exchange rate d. the US demand for yen will shift right e. none of the above
b. explanation: At an exchange rate below equilibrium, there is a shortage of yen, with Americans wanting more Japanese imports than the Japanese want to export. The price of yen is thus bid up to equilibrium. See explanation and graph given in class.
11. Foreign nations' demand for dollars increases as a. Americans purchase more foreign goods b. Foreigners purchase more American goods c. Americans travel more abroad d. Foreigners receive more U.S. direct investment e. Americans' exports fall
b. foreigners purchase more American goods
An MNC (multinational corporation) can
be a factor that increases the opportunity set of domestic investors increase economic efficiency. be a factor that increases the opportunities of the citizens of emerging markets.
An example(s) of political risk is
both the expropriation of assets and adverse changes in tax rules are correct.
1. If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, what are the corresponding bid and ask prices on the dollar? a. bid: $1.5; ask: $1.50 b. bid: €0.6667; ask: €0.6623 c. bid: €0.6623; ask: €0.6667 d. Cannot be determined with the information give. e. None of the above.
c
2. The AUD/$ spot exchange rate is AUD1.60/$ and the CHF/$ is CHF1.25/$. The AUD/CHF cross exchange rate is _____. a. AUD 0.7813/CHF b. AUD 2.0000/CHF c. AUD 1.2800/CHF d. AUD 0.3500/CHF e. None of the above
c
Use the following information to answer the next two questions. The dollar-euro exchange rate is quoted at Bank A as $1.00= €0.8334 and the dollar-pound exchange rate is quoted at Bank B as $1.00 = £0.5556. Bank C quotes you a rate of £1.00 = €1.50 3. What is the euro/pound cross rate computed from the first two quotes in the information above? a. £1.50/€ b. €1.20/£ c. €1.50/£ d. €1.80/£ e. None of the above
c
A purely domestic firm that sources its products, sells its products, and raises its funds domestically
can still face serious competition from a multinational corporation that can source its products in one country, sell them in several countries, and raise its funds in a third country. can still face exchange rate risk, similarly to an MNC does. can be more competitive than an MNC on its home turf due to its superior knowledge of the local market.
14. What BOP account does the trade category belong to?
current account
Suppose that the exchange rate of U.S. dollars in for British pounds was £0.5303/$ on August 22. A week later on August 29 the exchange rate becomes $2.50/£. Which of the following best explains what has happened between August 22 and August 29? a. The U.S. dollar appreciated against the British pound. b. The British pound appreciated against the dollar c. The U.S. dollar depreciated against the British pound. d. (b) and (c) above e. None of the above
d explanation: On 8/22 the exchange rate required $1.89 to buy one British pound. On 8/29, $2.50 was required to buy one British pound. So the dollar depreciated against the pound. This is the same thing as saying the pound appreciated against the dollar
2. The ____ of the IMF's Balance-of-Payments Statistics measures whether a particular country is a net importer or exporter of manufactured goods. a. current account b. financial account c. overall balance d. trade balance e. None of the above
d.
Credit Suisse First Boston (CSFB) quotes the following rates for the U.S. dollar. Bid (€/$) Ask (€/$) Spot rate 0.8894 -0.8898 1-month forward 0.8938- 0.8942 3-month forward 0.9028 -0.9032 6-month forward 0.9164 -0.9168 12-month forward 0.9443 -0.9447 14. What is expected to happen to the value of the dollar?
increase
The advent of the euro marks the first time that sovereign countries have voluntarily given up their
monetary independence to foster economic integration.
A true MNC, with operations in dozens of different countries
must effectively manage foreign exchange risk.
Under a purely flexible exchange rate system
supply and demand set the exchange rates.
