Solutions for Determinants of Exchange Rates
INSTRUCTORS MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9TH ED.
CHAPTER 2 SUGGESTED ANSWERS TO CHAPTER 2 QUESTIONS
1. a. Describe how these three typical transactions should affect present and future exchange rates. Joseph E. Seagram & Sons imports a year's supply of French champagne. Payment in euros is due immediately.
ANSWER. The euro should appreciate relative to the dollar since demand for euros is rising. b. MCI sells a new stock issue to Alcatel, the French telecommunications company. Payment in dollars is due immediately.
ANSWER. The spot value of the dollar should increase as Alcatel demands dollars to pay for the new stock issue. The future value of the dollar should decline as dividend payments are sent to Alcatel and other Alcatel equipment and parts are imported. However, the value of the dollar in the future could increase if expanded MCI output substitutes for telecom imports. 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.
ANSWER. The spot price of the dollar should be unaffected. The future price of the dollar should increase as KAL repays the loan. 2. The maintenance of money's value is said to depend on the monetary authorities. What might the monetary authorities do to a currency that would cause its value to drop?
ANSWER. The value of any good or asset is driven by its scarcity. What the monetary authorities could do is to make money less scarce by issuing more of it. This would lower its scarcity value. Even though its nominal value will always be the same, the added supply will reduce the purchasing power per unit of money. 3. 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
CHAPTER 2 SUGGESTED ANSWERS TO CHAPTER 2 QUESTIONS
1. a. Describe how these three typical transactions should affect present and future exchange rates. Joseph E. Seagram & Sons imports a year's supply of French champagne. Payment in euros is due immediately.
ANSWER. The euro should appreciate relative to the dollar since demand for euros is rising. b. MCI sells a new stock issue to Alcatel, the French telecommunications company. Payment in dollars is due immediately.
ANSWER. The spot value of the dollar should increase as Alcatel demands dollars to pay for the new stock issue. The future value of the dollar should decline as dividend payments are sent to Alcatel and other Alcatel equipment and parts are imported. However, the value of the dollar in the future could increase if expanded MCI output substitutes for telecom imports. 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.
ANSWER. The spot price of the dollar should be unaffected. The future price of the dollar should increase as KAL repays the loan. 2. The maintenance of money's value is said to depend on the monetary authorities. What might the monetary authorities do to a currency that would cause its value to drop?
ANSWER. The value of any good or asset is driven by its scarcity. What the monetary authorities could do is to make money less scarce by issuing more of it. This would lower its scarcity value. Even though its nominal value will always be the same, the added supply will reduce the purchasing power per unit of money. 3. 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