1. Laney Co. produces hospital equipment. Most of its revenues are in the United States. About half of its expenses require outflows in Mexican pesos (to pay for Mexican materials). Most of Laneys competition is from U.S. firms that have no international business at all. How will Laney Co. be affected if the peso strengthens?
2. Brown, Inc., exports chairs to Europe (invoiced in U.S. dollars) and competes against local European companies. If purchasing power parity exists, why would Brown not benefit from a stronger euro?
3. Boston Co. (a U.S. firm) attempts to determine its economic

exposure to movements in the Swiss franc, by applying regression analysis to data over the last 36 quarters:

SP = b0 + b1e + u

where SP represents the percentage change in Bostons stock price per quarter, e represents the percentage change in the franc exchange rate per quarter, and u is an error term. Based on the analysis, the b0 coefficient is zero and the b1 coefficient is -.4 and is statistically significant. Assume that interest rate parity exists. Today, the spot rate of the franc is $.80, the 90-day Swiss interest rate is 1%, and the 90-day U.S. interest rate is 2%. Assume that the 90-day forward rate is expected to be an accurate forecast of the future spot rate. Would you expect that Bostons value will be favorably affected, unfavorably affected, or not affected by its economic exposure over the next quarter? Explain.