Chapter 10 - The Foreign Exchange Market
If the United States has a weak dollar relative to the euro, what is the impact for a European importer buying products from the United States that are priced in dollars?
The European company will benefit from its relatively strong euro.
Which of the following is the most important vehicle currency by trade volume?
US dollar
When is a currency said to be externally convertible?
When only nonresidents can convert it into a foreign currency without any limitations.
Apple has tried to protect the dollar value of its foreign sales by
buying currency forward to hedge against future increases.
If many people want euros and euros are in short supply, and a few people want Japanese yen and yen are in plentiful supply, the yen is likely to ________ against the euro.
depreciate
Assuming the 60-day forward exchange rate was $1 = ¥110 and the spot exchange rate was $1 = ¥120, the dollar is selling at a(n) ________ on the 60-day forward market.
discount
Apple and other large technology firms are anticipating a sustained rise in the value of the dollar in foreign exchange markets. The firms are facing ________ risk.
economic
The extent to which a firm's future international earning power is affected by changes in exchange rates is called
economic exposure
You are the CEO of a U.S. company's subsidiary in India. Your subsidiary, as many other foreign companies in India, imports components from other parts of the world, including the United States. In May 2013 your subsidiary made an order for 1,000 units of equipment components manufactured in the U.S., which should be shipped to India by September 2013, when the payment of $50,000 is due. The exchange rate in May 2013 was 1 INR = $0.0185. After the U.S. Fed announced future changes in its policy in summer 2013, which would lead to increase in interest rates in the U.S., your analyst made calculations that the Indian rupee would depreciate further from its rate in July 2013 of 1 INR = $0.0168 to 1 INR = $0.015 by September 2013. Despite continuing depreciation of the Indian rupee, your subsidiary still would have to pay the U.S. supplier $50,000 in September 2013. You decided to hedge against further depreciation of the Indian rupee by entering into a 60-day forward exchange transaction with a foreign exchange dealer at the rate of 1 INR = $0.0158. Thus, the spot exchange rate at the time of your decision to hedge is ________ and the forward exchange rate is ____________.
1 INR= $0.0168; 1 INR= $0.0158
In 2014, the value of the U.S. dollar relative to the euro was about 30 percent weaker than its value in 2001. How is a weak currency an advantage in trade?
A weak currency boosts export sales for the country.
Why do you think the value of the Indian rupee declined against that of the U.S. dollar after the U.S. Fed had announced that it would begin to wind down its economic stimulus program? Check all that apply.
Increase in U.S. interest rate U.S.'s money supply expansion India's restriction on foreign capital
What is the impact of a strong dollar relative to the euro for a U.S. consumer buying a Porsche produced in Germany with parts from Slovakia?
The car should be less expensive for the U.S. consumer.
Where is the foreign exchange market located?
The foreign exchange market is not located in any one place. Rather, it is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems. The most important trading centers are London, New York, Zurich, Tokyo, and Singapore. Two significant features of the market are: (1) it never sleeps and (2) high-speed computer linkages between trading centers around the globe have effectively created a single market.
The relationship between the U.S. dollar and the European Union's euro has been up and down. In 2018, for example, a strong U.S. economy together with persistent economic weakness in Europe resulted in American exports to the euro zone being 17 percent more expensive when priced in euros. Which type of exchange rate exposure are managers dealing with in this longer-term scenario?
economic exposure
A lead strategy involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate.
false
What is the name of the market in which the currency of one country is converted into currency of another country?
foreign exchange market
Apple, Microsoft, Google, and other major technology companies have all reported lower earnings as a result of the strong dollar. The adverse consequences of unpredictable changes in exchange rates is called
foreign exchange risk
The rate at which one currency is converted into another is
the exchange rates
According to the law of one price, identical products sold in different countries must sell for the same price when
their price is expressed in terms of the same currency.
Apple's 2015 fourth quarter earnings were $80.8 billion, yet the company reported just $75.9 billion after factoring in exchange rate movements. Apple's lower earnings are a result of
transaction risk
If the spot rate is $1 = ¥120, and the 30-day forward rate is $1 = ¥130, the dollar is selling at a premium in the forward market.
true
Most foreign exchange transactions involve U.S. dollars on one side.
true
The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.
true
The rate at which one currency is converted into another is known as the exchange rate.
true