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CHAPTER 1 QUESTIONS 1. a. What factors appear to underlie the Asian currency crisis? b. What lessons can we learn from the Asian currency crisis?

CHAPTER 1 QUESTIONS

1. a. What factors appear to underlie the Asian currency crisis?

b. What lessons can we learn from the Asian currency crisis?

  1. Why might total risk be relevant for a multinational corporation?
  2. In what ways do financial markets grade government economic policies?

CHAPTER 2 QUESTIONS

  1. Describe how these three typical transactions should affect present and future exchange rates.

a. Joseph E. Seagram & Sons imports a year's supply of French champagne. Payment in euros is due immediately.

b. MCI sells a new stock issue to Alcatel, the French telecommunications company. Payment in dollars is due immediately.

c. Korean Airlines buys five Boeing 747s. As part of the deal, Boeing arranges a loan to KAL for the purchase amount from the U.S. Export Import Bank. The loan is to be paid back over the next seven years with a two year grace period.

2. For each of the following six scenarios, say whether the value of the dollar will appreciate, depreciate, or remain the same relative to the Japanese yen. Explain each answer. Assume that exchange rates are free to vary and that other factors are held constant.

  1. The growth rate of national income is higher in the United States than in Japan.
  2. Inflation is higher in the U.S. than in Japan.
  3. Prices in Japan and the United States are rising at the same rate.
  4. Real interest rates are higher in the United States than in Japan.
  5. The United States imposes new restrictions on the ability of foreigners to buy American companies and real estate.
  6. U.S. wages rise relative to Japanese wages, and American productivity falls behind Japanese productivity.

3. As mentioned in the chapter, Hong Kong has a currency board that fixes the exchange rate between the U.S. and HK dollars.

  1. What is the likely consequence of a large capital inflow for the rate of inflation in Hong Kong? For the competitiveness of Hong Kong business? Explain.
  2. Given a large capital inflow, what would happen to the value of the Hong Kong dollar if it were allowed to freely float? What would be the effect on the competitiveness of Hong Kong business? Explain.
  3. C. Given a large capital inflow, will Hong Kong business be more or less competitive under a currency board or with a freely-floating currency? Explain.

CHAPTER 2 PROBLEMS

  1. On August 8, 2000, Zimbabwe changed the value of the Zim dollar from Z$38/U.S.$ to Z$50/U.S.$.

a. What was the original U.S. dollar value of the Zim dollar? What is the new U.S. dollar value of the Zim dollar?

b. By what percent has the Zim dollar devalued (revalued) relative to the U.S. dollar?

c. By what percent has the U.S. dollar appreciated (depreciated) relative to the Zim dollar?

2. In 1995, one dollar bought 80. In 2000, it bought about 110.

a. What was the dollar value of the yen in 1995? What was the yens dollar value in 2000?

b. By what percent has the yen fallen in value between 1995 and 2000?

c. By what percent has the dollar risen in value between 1995 and 2000?

3. On February 1, the euro is worth $0.8984. By May 1, it has moved to $0.9457. By how much has the euro appreciated or depreciated against the dollar over this 3-month period?

CHAPTER 3 QUESTIONS

1. a. What are the five basic mechanisms for establishing exchange rates?

b. How does each work?

c. What costs and benefits are associated with each mechanism?

d. Have exchange rate movements under the current system of managed floating been excessive? Explain.

2. Gold has been called "the ultimate burglar alarm." Explain what this expression means.

  1. How did the European Monetary System limit the economic ability of each member nation to set its interest rate to be different from Germany's?

CHAPTER 3 PROBLEMS

  1. During the currency crisis of September 1992, the Bank of England borrowed DM 33 billion from the Bundesbank when a pound was worth DM 2.78 or $912. It sold these DM in the foreign exchange market for pounds in a futile attempt to prevent a devaluation of the pound. It repaid these DM at the post-crisis rate of DM 2.50:1. By then, the dollar:pound exchange rate was $1.782:1.

a. By what percentage had the pound sterling devalued in the interim against the Deutsche mark? Against the dollar?

b. What was the cost of intervention to the Bank of England in pounds? In dollars?

2. Suppose the central rates within the ERM for the French franc and DM are FF 6.90403:ECU 1 and DM 2.05853:ECU 1, respectively.

a. What is the cross-exchange rate between the franc and the mark?

b. Under the original 2.25% margin on either side of the central rate, what were the approximate upper and lower intervention limits for France and Germany?

c. Under the revised 15% margin on either side of the central rate, what are the current approximate upper and lower intervention limits for France and Germany?

3. A Dutch company exporting to France had FF 3 million due in 90 days. Suppose that the current exchange rate was FF 1 = Dfl 0.3291.

A. Under the exchange rate mechanism, and assuming central rates of FF 6.45863/ECU and Dfl 2.16979/ECU, what was the central cross-exchange rate between the two currencies?

B. Based on the answer to part a, what was the most the Dutch company could lose on its French franc receivable, assuming that France and the Netherlands stuck to the ERM with a 15% band on either side of their central cross rate?

C. Redo part b, assuming the band was narrowed to 2.25%.

D. Redo part b, assuming you know nothing about the current cross-exchange rate.

CHAPTER 5 QUESTIONS

  1. In a freely floating exchange rate system, if the current account is running a deficit, what are the consequences for the nation's balance on capital account and its overall balance of payments?
  2. Suppose Lufthansa buys $400 million worth of Boeing jets in 2010 and is financed by the U.S. Eximbank with a five year loan that has no principal or interest payments due until 2011. What is the net impact of this sale on the U.S. current account, capital account, and overall balance of payments for 2010?
  3. In the early 1990s, Japan underwent a recession that brought about a prolonged slump in consumer spending and capital investment (it was estimated that in 1994 only 65 percent of Japan's manufacturing was being used). At the same time, the U.S. economy emerged from its recession and began expanding rapidly. Under these circumstances, what would you predict would happen to the U.S. trade deficit with Japan?

CHAPTER 5 PROBLEMS

1. How would each of the following transactions show up on the U.S. balance of payments accounts?

a. Payment of $50 million in Social Security to U.S. citizens living in Costa Rica.

b. Sale overseas of 125,000 Elvis Presley CDs.

c. Tuition receipts of $3 billion received by American universities from foreign students.

d. Payment of $1 million to U.S. consultants A.D. Little by a Mexican company.

e. Sale of a $100 million Eurobond issue in London by IBM.

f. Investment of $25 million by Ford to build a parts plant in Argentina.

g. Payment of $45 million in dividends to U.S. citizens from foreign companies.

2. Set up the double-entry accounts showing the appropriate debits and credits associated with the following transactions:

a. ConAgra, a U.S. agribusiness, exports $80 million of soybeans to China and receives payment in the form of a check drawn on a U.S. bank.

b. The U.S. government provides refugee assistance to Somalia in the form of corn valued at $1 million

c. Dow Chemical invests $500 million in a chemical plant in Germany financed by issuing bonds in London.

d. General Motors pays $5 million in dividends to foreign residents, who choose to hold the dividends in the form of bank deposits in New York.

e. The Bank of Japan buys up one billion dollars in the foreign exchange market to hold down the value of the yen and uses these dollars to buy U.S. Treasury bonds.

f. Cemex, a Mexican company, sells $2 million worth of cement to a Texas company and deposits the check in a bank in Dallas.

g. Colombian drug dealers receive $10 million in cash for the cocaine they ship to the U.S. market. The money is smuggled out of the United States and then invested in U.S. corporate bonds on behalf of a Cayman Islands bank.

3. The following transactions (expressed in U.S. $ billions) take place during a year. Calculate the U.S. merchandise-trade, current-account, capital-account, and financial-account balances.

a. The United States exports $300 of goods and receives payment in the form of foreign demand deposits abroad.

b. The United States imports $225 of goods and pays for them by drawing down its foreign demand deposits.

c. The United States pays $15 to foreigners in dividends drawn on U.S. demand deposits here.

d. American tourists spend $30 overseas using traveler's checks drawn on U.S. banks here.

e. Americans buy foreign stocks with $60, using foreign demand deposits held abroad.

f. The U.S. government sells $45 in gold for foreign demand deposits abroad

g. In a currency support operation, the U.S. government uses its foreign demand deposits to purchase $8 from private foreigners in the United States.

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