Answers to End-of-Chapter 16 Questions
ANSWERS TO END-OF-CHAPTER 16 QUESTIONS
16-1 The U.S. dollar. The primary reason for using the dollar was that it provided a relatively stable benchmark, and it was accepted universally for transactions.
16-2 Under the fixed exchange rate system, the fluctuations were limited to +1 percent and -1 percent. Under the floating exchange rate system, there are no agreed-upon limits. Currently, the 12 countries making up the EMU have their national currencies fixed to the euro; however, the value of the euro continues to fluctuate. Beginning in 2002, these national currencies will be phased out and only the euro will exist.
16-3 A dollar will buy more euros.
16-4 There will be an excess supply of dollars in the foreign exchange markets, and thus, this will tend to drive down the value of the dollar. Foreign investments in the United States will increase.
16-5 Taking into account differential labor costs abroad, transportation, tax advantages, and so forth, U.S. corporations can maximize long-run profits. There are also nonprofit behavioral and strategic considerations, such as maximizing market share and enhancing the prestige of corporate officers.
16-6 The foreign project’s cash flows have to be converted to U.S. dollars, since the shareholders of the U.S. corporation (assuming they are mainly U.S. residents) are interested in dollar returns. This subjects them to exchange rate risk, and therefore requires an additional risk premium. There is also a risk premium for political risk (mainly the risk of expropriation) that should be included.
16-7 A Eurodollar is a dollar deposit in a foreign bank, normally a European bank. The foreign bank need not be owned by foreigners--it only has to be located in a foreign country. For example, a Citibank subsidiary in Paris accepts Eurodollar deposits. The Frenchman’s deposit at Chase Manhattan Bank in New York is not a Eurodollar deposit. However, if he transfers his deposit to a bank in London
16-1 The U.S. dollar. The primary reason for using the dollar was that it provided a relatively stable benchmark, and it was accepted universally for transactions.
16-2 Under the fixed exchange rate system, the fluctuations were limited to +1 percent and -1 percent. Under the floating exchange rate system, there are no agreed-upon limits. Currently, the 12 countries making up the EMU have their national currencies fixed to the euro; however, the value of the euro continues to fluctuate. Beginning in 2002, these national currencies will be phased out and only the euro will exist.
16-3 A dollar will buy more euros.
16-4 There will be an excess supply of dollars in the foreign exchange markets, and thus, this will tend to drive down the value of the dollar. Foreign investments in the United States will increase.
16-5 Taking into account differential labor costs abroad, transportation, tax advantages, and so forth, U.S. corporations can maximize long-run profits. There are also nonprofit behavioral and strategic considerations, such as maximizing market share and enhancing the prestige of corporate officers.
16-6 The foreign project’s cash flows have to be converted to U.S. dollars, since the shareholders of the U.S. corporation (assuming they are mainly U.S. residents) are interested in dollar returns. This subjects them to exchange rate risk, and therefore requires an additional risk premium. There is also a risk premium for political risk (mainly the risk of expropriation) that should be included.
16-7 A Eurodollar is a dollar deposit in a foreign bank, normally a European bank. The foreign bank need not be owned by foreigners--it only has to be located in a foreign country. For example, a Citibank subsidiary in Paris accepts Eurodollar deposits. The Frenchman’s deposit at Chase Manhattan Bank in New York is not a Eurodollar deposit. However, if he transfers his deposit to a bank in London