BEC 3

Question 1

Regarding exchange rates, what will impose a big risk for a particular country?

Answer 1

Payables denominated in a foreign currency when the domestic currency falls. The foreign currency will be increasing in value as the domestic currency decreases in value. Therefore, it will result in a loss for the country holding the payables.

Question 2

Regarding exchange rates, what situations will impose a minimal amount of risk and will result in a gain for the country?

Answer 2

• Receivables denominated in a foreign currency when the foreign currency increases
• Payables denominated in a foreign currency when the foreign currency decreases
• Receivables denominated in a foreign currency when the domestic currency decreases

Question 3

What is the relationship between exchange rate fluctuations and the value of imports/exports?

Answer 3

• Domestic currency appreciates - more expensive relative to the foreign currency; exports become more expensive and imports become cheaper/inflows increase. The price of domestic goods relative to foreign goods increases.
• Domestic currency depreciates - less expensive relative to the foreign currency; exports become cheaper and imports become more expensive/inflows decrease. The price of domestic goods relative to foreign goods decreases.