8.4 Exchange Rates - Factors and Risk Mitigation Flashcards
When the U.S. dollar is expected to rise in value against foreign currencies, a U.S. company with foreign currency denominated receivables and payables should
A. Speed up collections and slow down payments.
B. Slow down collections and speed up payments.
C. Speed up collections and speed up payments.
D. Slow down collections and slow down payments.
A. Speed up collections and slow down payments.
The proper action would be to increase collections and decrease payments. Collections should be made quickly and converted into dollars to sustain the increase in their value as the dollar appreciates. Decreasing payments would be profitable because, as the company exchanges dollars for foreign currency at a later date, it will receive more of the foreign currency, thus lowering its real cost.
A shift of the demand curve for a country’s currency to the right could be caused by which of the following?
A. A foreign government placing restrictions on the importation of the country’s goods.
B. A fall in the country’s interest rates.
C. Domestic inflation worsens.
D. A rise in consumer incomes in another country.
D. A rise in consumer incomes in another country.
Citizens with higher incomes look for new consumption opportunities in other countries, driving up the demand for those currencies. Thus, as incomes rise in one country, the prices of foreign currencies rise as well.
A publicly-traded company based in Japan is planning on expanding its operations into Germany. The expansion is estimated to cost ¥500 million, but the company needs euros to implement the expansion. The company is not well known in Germany and therefore hesitant to issue a euro-denominated bond in the German marketplace. If the company were to issue a yen-denominated 20-year bond in Japan, which one of the following contracts should the company use?
A. Currency forward.
B. Currency futures.
C. Currency options.
D. Currency swap.
D. Currency swap.
A currency swap is when two parties would like to hedge exchange rate risks by swapping cash flows in each other’s currency. If the Japanese company engages in a currency swap with a European country, it will have access to euros.
A fall in the demand for a country’s currency can be caused by any of the following except:
A. A foreign government places restrictions on the importation of the country’s goods.
B. The country’s government raises barriers to the cross-border flow of capital.
C. The country’s inflation rate decreases.
D. Interest rates in the country fall.
C. The country’s inflation rate decreases.
The currency of a country with a falling inflation rate retains more purchasing power than a currency with high inflation. Demand for a currency with increasing purchasing power will tend to rise.
