Question

Answer the following questions and give an explanation of WHY you selected that answer. Please type the answers.

1. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could:

A - Obtain a 90-day forward purchase contract on Canadian dollars.

B - Sell Canadian dollars 90 days from now at the spot rate.

2 - In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to depreciate and invest in the country whose currency is expected to appreciate :

A - True

B - False

3- The valuation of an MNC should decrease when an event causes the expected cash flows from foreign to _______ and when foreign currencies denominating these cash flows are expected to _______.

A - decrease; appreciate

B- decrease; depreciate

4. Which of the following theories identifies the non-transferability of resources as a reason for international business?                                               

A - theory of comparative advantage.

B- imperfect markets theory.

5. Assume the Canadian dollar is equal to $.80 and the British Pound is equal to $1.50. The value of the British Pound in Canadian dollars is?                                        

A - about 1.875 Canadian dollars

B - about 1.20 Canadian dollars

6- To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:                                           

A - sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.

B- sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

Answer 1

1. A - Obtain a 90-day forward purchase contract on Canadian dollars.

Since C$ are required in future to make payment, purchase contract will be taken and not sale contract

2. A - True

Since more amount of depreciated currency will be obtained in the future while converting back

3.B- decrease; depreciate

Since less of home currency will be obtained by selling depreciated foreign currency

4. A - theory of comparative advantage.

5.C$/Pound = (C$/Dollar)*(Dollar/Pound)

= (1/0.8)*1.50

= $1.875 C$

A - about 1.875 Canadian dollars

6. B- sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

Increasing supply of pounds will lead to a reduction in its value