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# Exchange Rates

Exchange rates are needed for international transactions to occur because it is necessary to transact in the same currency. There are two types of exchange rates: nominal and real exchange rates. Nominal exchange rates show how much foreign currency can be exchanged for a unit of domestic currency or vice versa (the number that you would see at a money changer). Real exchange rates represents the number of goods that can be bought in another country relative to your own country; that is to say, it takes into account the ratio of price levels between two countries.

The relationship between net exports and real exchange rates is important to the topic of exchange rates. When the real exchange rate is high, then the domestic relative price of goods is higher than the relative price of goods overseas. When this occurs, a country will import goods from other countries because foreign goods will be cheaper. This also causes net exports to decrease. The opposite will therefore occur when the real exchange rate decreases.

With exchange rates, there are three different types of regimes: floating, pegged, and fixed rates. A floating exchange rates allows the exchange rate to be completely determined by market forces - demand and supply of the currency. A fixed exchange rate is where the government sets a pre-determined exchange rate and then uses its foreign reserve and monetary policy to maintain it. A pegged exchange is where an economy will set it's currency at a fixed exchange rate to another foreign currency; it will move in line with the currency it has pegged itself to. For example, the Chinese RMB is pegged to the US dollar.

The exchange rate and exchange rate behaviour provide insight to understanding how foreign exchange is conduced. Present exchange rates reflect the predicted values of future variables.

### Economics for the Global Manager.

Select a U.S. multinational company, and respond to the following questions: â€¢In terms of currency denomination, describe how the firm prices its revenues and costs. â€¢For multinational enterprises (MNEs) with multiple foreign operations, consider any 2 of those operations and the contribution they are making to the parent

### Exchange rate of a Rupee

BUS 635 Business Economics for the World Market Session 7 Bonus Points 10 Points (max) to be added to final total Note: This portion should take about 10-20 minutes to complete IF YOU ARE PREPARED. If you are NOT well-prepared will take much longer, depending upon how long it takes you to study and learn it. Due: Jul

### Microeconomics

Should MNCs Use Forward Rates to Estimate Dollar Cash Flows of Foreign Projects? POINT: Yes. An MNC's parent should use the forward rate for each year in which it will receive net cash flows in a foreign currency. The forward rate is market-determined and serves as a useful forecast for future years. COUNTER-POINT: No. An

### Properties of money and currency valuation

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### Phillips Curve and Exchange Rate

The price level in the economy between 2007 and 2008 rose from 100 to 105. Between 2008 and 2009, the price level rose from 105 to 110.25. How does the short-run Phillips curve predict the unemployment rate will change as a result? A) The unemployment rate will decrease since inflation decreased. B) The unemployment rate will

### U.S. Freely Floating Exchange Rate and China's Managed Floating Exchange Rate

Describe the difference between the U.S. Freely Floating Exchange Rate and China's Managed Floating Exchange Rate.

### Hedging, Insuring and Diversifying

10.1 In the northeast United States and in eastern Canada, many people heat their houses with heating oil. Imagine you are one of these people, and you are expecting a cold winter, so you are planning your heating oil requirements for the season. The current price is \$2.25 per US gallon, but you think that in six months, when yo

### Should the CFO invest in CD's denominated in dollars or in euros?

Suppose the CFO of a German corporation with surplus cash flow has 1 million Euros to invest. Suppose that interest rates on 1-year CD deposits in US banks are 2%, while rates on 1year CD deposits denominated in euros in German banks are currently 4.5%. Suppose further that the CFO expects that the (euro/\$) exchange rate will in

### How the Fed can defend the exchange rate of the dollar.

If the Fed wished to defend the exchange rate of the dollar (i.e. prevent the dollar exchange rate from falling) what policy action could it take? Explain.

### Calculating Exchange Rate

Using the attached table: 1) Calculate the bid and ask euro-dollar rate. 2) Calculate (showing all the exchange rates used at each step) how many dollars you would end up with if you started with \$1,000 USD, and then converted: 1. \$1,000 US dollars to Swiss francs 2. Swiss francs to euros 3. Euros to pounds, and then 4.

### Expectation of declining housing prices

Assume that the expectation of declining housing prices cause households to reduce their demand for new houses and the financing that accompanies it. The nation has highly mobile international capital markets and a flexible exchange rate system. Use the three sector model to solve the following problems. 11.3. Net exports

### effect on currency

Venezuela had considerable capital outflows after the election of Hugo Chavez. If Venezuela had fixed exchange rates, what effect would these flows have had on Venezuela's overall balance and value of the Bolivar (the Venezuelan currency)? A. Overall balance would not change and value of the Bolivar would fall B. Overa

### Organizational Designs Centralization

Discuss how a company could benefit from either centralization or decentralization. Explain your rationale. Select a large U-form or M-form organization and describe how it would be different if it switched form (i.e., a U-form organization switching to an M-form, or an M-form organization switching to a U-form).

Sept 1.3634 C\$/US\$ Oct 1.3221 C\$/US\$ In September 2003, a U.S. retailer wanted to purchase canola oil from a Canadian farm. At that time in Canada, one barrel of canola oil cost C\$2.00 (two Canadian dollars). The Canadian farm promised to deliver the canola oil in October 2003. Given the information above, which of the f

### Exchange Rate of Canola Oil Trade

Sept 2003 1.3634 C\$/US\$ In September 2003, a U.S. retailer wanted to purchase canola oil from a Canadian farm. At that time in Canada, one barrel of canola oil cost C\$2.00 (two Canadian dollars). Note that the U.S. retailer had U.S. dollars, so the retailer needed to exchange U.S. dollars for Canadian dollars to buy cano

### New Price of a Kilogram of Kenyan Coffee Beans

The table below shows the prices of two goods. Suppose wheat is produced in the U.S. and coffee beans are produced in Kenya. KENYAN COFFEE exchange rate Price in Kenya Price in US 1\$=75 shillings 150 shillings \$2 \$1=60 shillings 150 shillings \$???? Suppose that the

### The exchange rate and euro depreciation

The exchange rate changed from Ã¢?Â¬ 2.5/ \$ to Ã¢?Â¬ 2.0/ \$. Therefore: A. The euro depreciated by 25% and the dollar appreciated by 20%. B. The euro appreciated by 20% and the dollar depreciated by 20%. C. The euro appreciated by 25% and the dollar depreciated by 20%. D. The euro depreciated by 20% and the dolla

### Triangle Exchange Opportunity- Foreign Currency Exchange

Bid Ask ZAR/Â£ 14.2 14.52 ZAR/\$ 10.38 10.56 \$/Â£ 1.33 1.34 Consider the above exchange rates: a) Do the above exchange rates present an arbitrage opportunity? Explain? b) Calculate the arbitrage profit assuming an initial investment amount of ZAR 1 million?

### Effects of Currency Appreciation and Depreciation

a) Given illustrative data for a company selling its output in a foreign country, calculate effects of an appreciation and a depreciation in the exchange rate on the price of its output in that country and the likely effects on the demand for its output. b) For a company sourcing key inputs in a foreign country, calculate eff

### Predict the effects on the exchange rate between the U.S. dollar and the Japanese Yen.

In the flexible exchange rate system, discuss the effects of the following events on the exchange rate between U.S. dollar and Japanese Yen: Please indicate whether US\$ will appreciate or depreciate. A) Other things being equal, the trade deficit between U.S. and Japan increased, or the U.S. imports from Japan increased fast

### Corporate Finance

1) Authorized and available shares Aspin Corporations charter authorizes issuance of 2,000,000 shares of common stock. Currently, 1,400,000 shares are outstanding and 100,000 shares are being held as treasury stock. The firm wishes to raise \$ 48,000,000 for a plant expansion. Discussions with its investment bankers indicate that

### Explain the Difference between Appreciation and Depreciation

Explain the difference between appreciation and depreciation of a nation's currency. How do these changes affect the foreign exchange market?

### Calculating the Equivalent Value of a Bicycle

A bicycle manufactured in the United States costs \$100. Using the exchange rates listed in Table 1, what would the bicycle cost in each of the following countries? a. Argentina b. Britain c. Canada Country US \$ per currency Currency per US \$ Argentina (peso) 0.3269

### Exchange rates

The U.S. imports Japanese cars with a domestic price of 5,000,000 yen and the yen/dollar exchange rate is 120 on January 1, 2003. On January 1, 2004 the yen/dollar exchange rate is 125. What is the dollar price of the cars on January 1, 2003? What is the dollar price of the cars on January 1, 2004?

### opportunity cost for large quantities of cash

1.What is the opportunity cost of holding large quantities of cash? 2.Why is it both an advantage and a disadvantage that fixed exchange rates limit the government's ability to carry out monetary and fiscal policy?

### Exchange rate fluctuation and company profitability

If the U.S. dollar were to appreciate substantially, what steps could a domestic manufacturer such as Cummins Engine Co. of Columbus, Indiana, take in advance to reduce the effect of the exchange rate fluctuation on company profitability: key words: Demand and forecasting, managing exports.

### Nominal Exchange Rate Turn

Consider two open economies A (national) and B. In this economy only one good is produced for time t = 0 and price P(0,A)=1 Dollar and P(0,B) = 1,5 Euro. The nominal exchange rate for that time is E(0)=1,5 Euro/Dollar. Country A has inflation of (A) = 10% Country B has inflation of (B) = 5% To which value the

### Exchange Rate and Depreciation

If the European euro were to depreciate relative to the U.S. dollar in the foreign exchange market, would it be easier of harder for the French to sell their wine in the United States? Suppose you were planning a trip to Paris. How would depreciation of the euro change the dollar cost for your trip?

### Dollar Up & Dollar Down

Explain Dollar Up & Dollar Down. Who is this good for? Explain Euro vs Dollar. Explain the Rate Peg

### Money change example problem

As the U.S. dollar appreciates in value relative to the Japanese Yen, what happens to the price of U.S. goods in Japan? What happens to the price of Japanese goods in the U.S.? Why would a country (for example China) choose to keep their currency relatively pegged to the U.S. dollar? If the U.S. dollar were to appreciat