Francine is the CFO for a mid-sized corporation based in the USA. Her corporation needs to pay a German company 0,000 Euros in 30 days for materials Francine’s corporation is importing to the USA. Today’s spot rate for the exchange rate between the US Dollar and Euro is 1.2534. The 30 day forward rate is 1.2313. Ignoring interest rates,
Answer (C) is correct. Francine will pay fewer dollars for 10,000 Euros in 30 days than paying today. In 30 days, Francine can pay $1.2312 dollars per Euro, but if she were to pay today using the spot rate, she would pay $1.2535 per Euro. The bill is at a fixed price and ignoring interest rates, it is cheaper in dollars for Francine to pay the bill in 30 days. Therefore, the purchasing power of the dollar increases over the next 30 days.
Exchange rates are determined by
Answer (C) is correct. Although currencies can be supported by various means for short periods, the primary determinant of exchange rates is the supply of and demand for the various currencies. Under current international agreements, exchange rates are allowed to “float.” During periods of extreme fluctuations, however, governments and control banks may intervene to maintain stability in the market.
If consumers in Japan decide they would like to increase their purchases of consumer products made in the United States, in foreign currency markets there will be a tendency for
Answer (D) is correct. The increase in demand for U.S. products will increase the demand for the dollars necessary to pay for those products.
If the exchange rate has changed from 1 U.S. dollar to 5 foreign currency units (FCUs) to a rate of 1 U.S. dollar to 5.5 FCUs,
Answer (A) is correct. A single U.S. dollar now fetches more FCUs than before, indicating a gain in purchasing power (appreciation). The spread is 10% [(5.5 – 5.0) ÷ 5.0].
The spot rate for one Australian dollar is US $0.92685 and the 60-day forward rate is US $0.93005. Which one of the following statements is consistent with these facts?
Answer (A) is correct. The exchange rate for the Australian dollar is higher in the forward market than the spot market; the Australian dollar is therefore trading at a forward premium. From this, it follows that the U.S. dollar is trading at a forward discount.
If the dollar price of the euro rises, which of the following will occur?
Answer (A) is correct. As the dollar price of the euro rises, the euro’s buying power increases (i.e., it can be exchanged for more dollars than before). Thus, the buying power of the dollar has decreased.
What is the effect on prices of U.S. imports and exports when the dollar depreciates?
Answer (C) is correct. When the U.S. dollar depreciates, U.S. products become cheaper to foreign consumers. A depreciated dollar acts as a subsidy to exports by decreasing their price. The opposite is true for imports. When the dollar depreciates (loses purchasing power), imports become more costly. Thus, a depreciated U.S. dollar increases the prices of imported goods.
What is the effect when a foreign competitor’s currency becomes weaker compared to the U.S. dollar?
Answer (A) is correct.
If the foreign currency weakens compared with the U.S. dollar, the U.S. dollar will have more buying power in the foreign company’s country. Thus, the foreign company will be able to sell more products than the U.S. company for the same amount of dollars.
The U.S. dollar has a free-floating exchange rate. When the dollar has fallen considerably in relation to other currencies, the
Answer (D) is correct. A decline in the value of the dollar relative to other currencies lowers the price of U.S. goods to foreign consumers. Thus, exporters of goods produced in the U.S. benefit. Simultaneously, a low value for the dollar decreases imports by making foreign goods more expensive.
If the U.S. dollar declines in value relative to the currencies of many of the U.S. trading partners, the likely result is that
Answer (C) is correct. The decline in the value of the dollar reduces the prices of U.S. goods to foreigners and will tend to increase exports. Also, foreign goods will be higher priced (in dollars) and imports from foreign countries will tend to decrease, thus helping the
U.S. balance of payments.