What happens to the ₤-price that British residents pay for a $500 U.S. export good due to the exchange rate change above?

What happens to the ₤-price that British residents pay for a $500 U.S. export good due to the exchange rate change above?

 

 

What happens to the $-price that U.S. residents pay for a ₤1200  import good from Britain?

 

How do these changes affect the economic welfare of U.S. exporters and U.S. importers?

 

Suppose that the euro (€) appreciates from $1.00 per €1 to $1.20 per €1.  Determine whether the underlined individuals listed below would see that appreciation as a good or a bad thing.

 

A U.S. business buys €10,000 of chemicals from a German company.

 

 

 

QUESTIONS 6-8

 

An Italian clothing company buys $100,000 of leather from a U.S. leather maker.

 

Answer 6 / Italian clothing company:

 

A U.S. resident has a retirement account totaling €500,000 in a German bank.

 

Answer 7 / U.S. resident:

 

A U.S. company must make an interest payment of €25,000 to the French bank from which it borrowed last year.

 

Answer 8 / French bank:

 

QUESTION 9

 

You have an account payable to a German exporter for 100 Porsche Cayenne SUVs.  The seller offers a two percent discount for payment within 10 days and full payment due in 30 days (2/10 net 30).  Today the exchange rate is $1.10 per Euro.  You notice that the 30-day forward rate for the $/Euro is $1.07.  What should you do?  You owe 70,000 Euros for each of the cars (before any discounts).

 

Frank’s answer is: 70,000 (.98) = 68,600 euros or $75,460

70,000 (1.07) = $74,900 so hedge in a forward market and wait 30 days

 

Think of another a) problem and b) solution that shows you understand the concept.

 

Another Problem/Solution as Student Answer to Question 9:

 

QUESTION 10

 

You are changing planes in London for a quick flight to Paris where you will connect with your flight to Capetown. You are picking up reading material for the flight and are looking at the prices listed on the Economist magazine which conveniently lists prices in several different global currencies.  You note that the price in Pounds is 2.40 pounds and the price in Euros is 2 Euros.  The exchange rate for the dollar (your credit card was issued in the USA) is $1.15/pound and $1.10/euro.  Should you buy reading materials now or wait until you’re in Paris?

 

Franks’ answer is:  The exchange rate is 1.2 pounds per euro

2.4 (1.15) = $2.76

2 (1.10) = $2.20 so buy in Paris and save 56 cents or steal from first class as you are exiting plane and pay nothing!

 

Think of another a) problem and b) solution that shows you understand the concept.

 

Another Problem/Solution as Student Answer to Question 11:

 

QUESTION 11

 

You are a distributor of auto parts and you will receive a shipment of 10,000 brake pad sets from your Japanese distributor in June.  Payment of 400,000 yen is due in December.  You expect the yen to rise in value from its present rate of $1 = 130 yen to $1 = 100 yen by December.  You can borrow yen at 6% per year.  What should you do???

 

Frank’s answer is: 400,000/130 = $3,076 today

$4,000 dollars in December

Borrow 400,000 yen and pay today and pay back 412,000 yen or $3169.00 vs $4,000.

 

Think of another a) problem and b) solution that shows you understand the concept.

 

Another Problem/Solution as Student Answer to Question 12:

 

QUESTION 12

 

Of the myriad of factors that can cause a currency to fluctuate, list and explain three factors that you feel are most important.

 

Answer 13 / Factor 1:

 

Answer 14 / Factor 2:

 

Answer 15 / Factor 3: