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foundations of economics

Questions and Answers of Foundations Of Economics

1 Would you describe the exposure of the Sports Exports Company to exchange rate risk as transaction exposure? Economic exposure? Translation exposure?At the current time, the Sports Exports Company
6 Given that Thai roller blade manufacturers located in Thailand have begun targeting the UK roller blade market, how do you think Blades’ UK sales were affected by the depreciation of the Thai
5 Assuming Blades enters into the agreement with Jogs Inc, how will its overall transaction exposure be affected?Blades plc is currently exporting roller blades to Thailand and importing certain
4 Do you think Blades should import components from Japan to reduce its net transaction exposure in the long run? Why or why not?Blades plc is currently exporting roller blades to Thailand and
3 If Blades does not enter into the agreement with the US firm and continues to export to Thailand and import from Thailand and Japan, do you think the increased correlations between the Japanese yen
2 Using a spreadsheet, conduct a consolidated net cash flow assessment of Blades plc and estimate the range of net inflows and outflows for Blades for the coming year. Assume that Blades enters into
1 What type(s) of exposure (i.e., transaction, economic, or translation exposure) is Blades subject to? Why?Blades plc is currently exporting roller blades to Thailand and importing certain
28 Daily exchange rates and annual reports. The following website provides daily exchange rate data for several currencies over the last few months:http://www.oanda.com.a Use this website to assess
27 Exposure of an MNC’s subsidiary. Le Rozier SA is a French firm with a Chinese subsidiary that produces cell phones in China and sells them in Japan.This subsidiary pays its wages and its rent in
26 Invoicing policy to reduce exposure. Blackstone is a UK firm that exports its products to Canada. It faces competition from many firms in Canada. Its price to customers in Canada has generally
25 Potential effects if the United Kingdom adopted the euro. The British pound’s interest rate has historically been higher than the euro’s interest rate. The United Kingdom has considered
24 Lagged effects of exchange rate movements.Uton plc is an exporter of products to Singapore. It wants to know how its share price is affected by changes in the Singapore dollar’s exchange rate.
23 Changes in economic exposure. Walt Disney World built an amusement park in France that opened in 1992. How do you think this project has affected Disney’s economic exposure to exchange rate
22 Measuring economic exposure. Using the following cost and revenue information shown for DeKalb plc (UK) determine how the costs, revenue, and earnings items would be affected by three possible
21 Transaction exposure. Crediton plc is a UK firm that exports most of its products to Europe. It historically invoiced its products in euros to accommodate the importers. However, it was adversely
20 Using regression analysis to measure exposure.a How can a UK company use regression analysis to assess its economic exposure to fluctuations in the euro?b In using regression analysis to assess
19 Dual currency. In the early 1990s the UK government suggested that what is now called the euro could be used alongside local currencies. How would such a currency arrangement affect MNCs?
18 Speculating based on exposure. During the Asian crisis in 1998, there were rumours that China would weaken its currency (the yuan) against the US dollar and many European currencies. This caused
17 Impact of exchange rates on earnings. Cieplak NV is a Dutch-based MNC that has expanded into Asia. Its Dutch parent exports to some Asian countries, with its exports denominated in the Asian
16 Measuring changes in economic exposure.Renault SA measures the sensitivity of its profits to the pound and dollar exchange rate (relative to the euro). Explain how regression analysis could be
15 PPP and economic exposure. Boulder plc exports chairs to the US (invoiced in euros) and competes against local US companies. If purchasing power parity exists, why would Boulder not benefit from a
14 Economic exposure. Laurette SA is a French wholesale company that imports expensive highquality luggage and sells it to retail stores around Europe. Its main competitors also import high-quality
13 Economic exposure. Enid Ltd (UK) produces furniture and has no international business. Its major competitors import most of their furniture from Brazil and then sell it out of retail stores in the
12 Economic exposure. Holbein BV (Netherlands) produces hospital equipment. Most of its revenues are in the United States. About half of its expenses are in Philippine pesos (to pay for Philippine
11 Transaction exposure. Aggie plc (UK) produces chemicals. It is a major exporter to the United States, where its main competition is from other European exporters. All of these companies invoice
10 Translation exposure. Consider a period in which the US dollar weakens against the euro. How will this affect the reported earnings of a European-based MNC with US subsidiaries? Consider a period
9 Factors that affect a firm’s translation exposure.What factors affect a firm’s degree of translation exposure? Explain how each factor influences translation exposure.
8 Measuring economic exposure. Boston Ltd (UK)hires you as a consultant to assess its degree of economic exposure to exchange rate fluctuations. How would you handle this task? Be specific.
7 Exposure of domestic firms. Why are the cash flows of a purely domestic firm exposed to exchange rate fluctuations?
6 Transaction exposure. Fischer Ltd exports products from Europe to the US. It obtains supplies and borrows funds locally. How would the appreciation of the dollar be likely to affect its net cash
5 Currency effects on cash flows. How should appreciation of a firm’s home currency generally affect its cash inflows? How should depreciation of a firm’s home currency generally affect its cash
4 Currency correlations. Kopetsky SA (Poland) has net receivables in several currencies that are highly correlated with each other. What does this imply about the firm’s overall degree of
3 Factors that affect a firm’s transaction exposure.What factors affect a firm’s degree of transaction exposure in a particular currency? For each factor, explain the desirable characteristics
2 Assessing transaction exposure. Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year:Provide your assessment as to
1 Transaction versus economic exposure. Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its ‘net’ cash flows in each currency when
5 Assume that the euro is expected to strengthen against the dollar over the next several years. Explain how this will affect the consolidated earnings of Europe-based MNCs with subsidiaries in the
4 Using the information in the previous question, consider a proposal to price the exports to the US in euros and to use the French source for material.Would this proposal eliminate the exchange rate
3 Assume your firm Paris SA (France) currently exports to the US on a monthly basis. The goods are priced in dollars. Once material is received from a source, it is quickly used to produce the
2 Brume SA (France) considers importing its supplies from either Switzerland (denominated in Swiss francs) or South Africa (denominated in rand) on a monthly basis. The quality is the same for both
1 Given that shareholders can diversify away an individual firm’s exchange rate risk by investing in a variety of firms, why are firms concerned about exchange rate risk?
4 Does it appear that all of the forecasting techniques will lead to the same forecast of the euro’s future value? Which technique would you prefer to use in this situation?The Sports Exports
3 Explain how Jim can use a market-based forecast to forecast the future value of the euro. Do you think the market-based forecast will predict appreciation, depreciation, or no change in the value
2 Explain how Jim can use fundamental forecasting to forecast the future value of the euro. Based on the information provided, do you think that a fundamental forecast will predict appreciation or
1 Explain how Jim can use technical forecasting to forecast the future value of the euro. Based on the information provided, do you think that a technical forecast will predict future appreciation or
7 Do you think the technique you have identified in question 6 will always be the most accurate?Why or why not?Recall that Blades plc the UK-based manufacturer of roller blades, is currently both
6 What is the expected percentage change in the value of the baht during the next quarter based on the fundamental forecast? What is the forecasted value of the baht using this forecast? If the value
5 Assume that the technical forecast has been more accurate than the market-based forecast in recent weeks. What does this indicate about market efficiency for the baht–pound exchange rate? Do you
4 The current 90-day forward rate for the baht is£0.014. By what percentage is the baht expected to change over the next quarter according to a market-based forecast using the forward rate? What
3 Blades is considering using either current spot rates or available forward rates to forecast the future value of the baht. Available forward rates currently exhibit a large discount. Do you think
2 Which forecasting technique (i.e., technical, fundamental, or market-based) would be easiest to use in forecasting the future value of the baht? Why?Recall that Blades plc the UK-based manufacturer
1 Considering both Blades’ current practices and future plans, how can it benefit from forecasting the baht–pound exchange rate?Recall that Blades plc the UK-based manufacturer of roller blades,
27 Select an exchange rate and a forward rate for a given period.a Calculate:St = a0 + a1 Ft–1 + mt where: S = the spot rate at time t, FL-1 = = ao = a = the forward rate prediction for time t made
26 CME exchange rates. The website of the Chicago Mercantile Exchange (CME) provides information about the exchange and the futures contracts offered on the exchange. Its address is
25 Comparing market-based forecasts. For all parts of this question, assume that interest rate parity exists, the prevailing one-year UK nominal interest rate is low, and that you expect UK inflation
24 Selecting between forecast methods. Suppose Bolivia has a nominal one-year risk-free interest rate of 40%, which is primarily due to the high level of expected inflation. The euro nominal one-year
23 Forecasting Latin American currencies. The value of each Latin American currency relative to the euro is dictated by supply and demand conditions between that currency and the dollar. The values
22 Interpreting forecast bias information. The treasurer of Glencoe Ltd detected a forecast bias when using the 30-day forward rate of the euro to forecast future spot rates of the euro over various
21 Effect of September 11 on forward rate forecasts.The September 11, 2001 terrorist attack on the United States was quickly followed by lower interest rates in the United States. How would this
20 Testing for a forecast bias. You must determine whether there is a forecast bias in the forward rate.You apply regression analysis to test the relationship between the actual spot rate and the
19 Probability distribution of forecasts. Assume that the following regression model was applied to historical quarterly data:where et ¼ percentage change in the exchange rate of the Japanese yen in
18 Interpreting an unbiased forward rate. Assume that the forward rate is an unbiased but not necessarily accurate forecast of the future exchange rate of the yen over the next several years. Based
17 Forecasting based on PPP versus the forward rate. You believe that the Singapore dollar’s exchange rate movements are mostly attributed to purchasing power parity. Today, the nominal annual
16 Forward rate forecast. Assume that you obtain a quote for a one-year forward rate on the Mexican peso. Assume that Mexico’s one-year interest rate is 40%, while the UK one-year interest rate is
15 Forecasting the euro. Cooper plc periodically obtains euros to purchase German products. It assesses UK and German trade patterns and inflation rates to develop a fundamental forecast for the
14 Forecast error. Royce Ltd is a UK firm with future receivables one year from now in Canadian dollars and Brazilian real. Its Brazilian real receivables are known with certainty, and its estimated
13 Forecasting exchange rates of currencies that previously were fixed. When some countries in Eastern Europe initially allowed their currencies to fluctuate against the dollar, would the fundamental
12 Forecast error. The director of currency forecasting at Champaign-Urbana Ltd says, ‘The most critical task of forecasting exchange rates is not to derive a point estimate of a future exchange
11 Foreign exchange market efficiency. Assume that foreign exchange markets were found to be weak-form efficient. What does this suggest about utilizing technical analysis to speculate in euros? If
10 Forecasting with a forward rate. Assume that the four-year annualized interest rate in the United Kingdom is 9% and the four-year annualized interest rate in Singapore is 6%. Assume interest rate
9 Consistent forecasts. Brinnington plc is a UKbased MNC with subsidiaries in most major countries.Each subsidiary is responsible for forecasting the future exchange rate of its local currency
8 Limitations of a fundamental forecast. Wellington Ltd believes that future real interest rate movements will affect exchange rates, and it has applied regression analysis to historical data to
7 Measuring forecast accuracy. You are hired as a consultant to assess a firm’s ability to forecast. The firm has developed a point forecast for two different currencies presented in the following
6 Detecting a forecast bias. Explain how to assess performance in forecasting exchange rates. Explain how to detect a bias in forecasting exchange rates.
5 Mixed forecasting. Explain the mixed technique for forecasting exchange rates.
4 Market-based forecasting. Explain the marketbased technique for forecasting exchange rates. What is the rationale for using market-based forecasts? If the euro appreciates substantially against the
3 Fundamental forecasting. Explain the fundamental technique for forecasting exchange rates. What are some limitations of using a fundamental technique to forecast exchange rates?
2 Technical forecasting. Explain the technical technique for forecasting exchange rates. What are some limitations of using technical forecasting to predict exchange rates?
1 Motives for forecasting. Explain corporate motives for forecasting exchange rates.
5 Warden plc is considering a project in Venezuela, which will be very profitable if the local currency (bolivar)appreciates against the British pound. If the bolivar depreciates, the project will
4 Assume that Russian interest rates are much higher than UK interest rates. Also assume that interest rate parity (discussed in Chapter 7) exists. Would you expect the rouble to appreciate or
3 An analyst has stated that the British pound seems to increase in value over the two weeks following announcements by the Bank of England (the British central bank) that it will raise interest
2 Consider the following information:Assuming the forward rate was used to forecast the future spot rate, determine whether the Canadian dollar or the Japanese yen was forecasted with more accuracy,
1 Assume that the annual UK interest rate is expected to be 7% for each of the next four years, while the annual interest rate in India is expected to be 20%.Determine the appropriate four-year
2 If you were in Jim’s position, would you spend time trying to decide whether to hedge the receivables each month, or do you believe that the results would be the same (on average) whether you
1 Is Jim’s interpretation of the IFE theory correct?Every month, the Sports Exports Company receives a payment denominated in British pounds for the basketballs it exports to the United Kingdom.
5 PPP may hold better for some countries than for others. Given that the Thai baht has been freely floating for only a short period of time, how do you think Blades can gain insight into whether PPP
4 Given Blades’ future plans in Thailand, should the company be concerned with PPP? Why or why not?
3 How do you reconcile the high level of interest rates in Thailand with the expected change of the baht–pound exchange rate according to PPP?
2 What are some of the factors that prevent PPP from occurring in the short run? Would you expect PPP to hold better if countries negotiate trade arrangements under which they commit themselves to
1 What is the relationship between the exchange rates and relative inflation levels of the two countries?How will this relationship affect Blades’ Thai revenue and costs given that the baht is
38 From a reading of Appendix 8, carry out a variance ratio test measuring Z(k) for a particular currency chosen from your institution’s database or from Oanda.com. Choose at least 30 observations
37 Using your institutions databases, test one of the following equations:Kingdom and 2% in Canada. A call option with a three-month expiration date on Canadian dollars is available for a premium of
36 Currency interest rates. The ‘Market’ section of the Bloomberg website provides interest rate quotations for numerous currencies. Its address is http://www.bloomberg.com.a Go to the
35 Using a graph similar to Exhibit 8.2, represent the inflation differential and exchange rate percentage change for at least ten time periods between two chosen currencies. Plot the results and
34 IRP, PPP, and speculating in currency derivatives.The UK three-month interest rate (unannualized)is 1%. The Canadian three-month interest rate(unannualized) is 4%. Interest rate parity exists. The
33 IRP versus IFE. You believe that interest rate parity and the international Fisher effect hold. Assume that the UK interest rate is presently much higher than the New Zealand interest rate. You
32 Arbitrage and PPP. Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British
31 Applying IRP and IFE. Assume that Mexico has a one-year interest rate that is higher than the UK oneyear interest rate. Assume that you believe in the international Fisher effect (IFE) and
30 Interactive effects of PPP. Assume that the inflation rates of the countries that use the euro are very low, while other European countries that have their own currencies experience high
29 Impact of barriers on PPP and IFE. Would PPP be more likely to hold between the United Kingdom and Hungary if trade barriers were completely removed and if Hungary’s currency were allowed to

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