Corporate restructuring, international trade, and exchange rates

Question 1

Over the past year, incomes in Russia have risen across the board. Today’s spot rate with respect to the U.S. dollar is $1 = 30 rubles. What is consistent with these facts?

Answer 1

One year ago, $1 could be exchanged for 29 Russian Rubles on the spot market

As income rise in one country, the prices of foreign currencies rise as well

Question 2

If risk is purposely undertaken in the foreign currency market, the investor in foreign currency then becomes

Answer 2

A speculator

An individual who purposely accepts exchange rate risk is a speculator. Speculators buy and sell foreign currencies in anticipation of favorable changes in rates.

Question 3

What is not a potential source of tax savings in an acquisition

Answer 3

economies of scale

Question 4

An American importer of English clothing has contracted to pay an amount fixed in British pounds 3 months from now. If the importer worries that the U.S. dollar may depreciate sharply against the British pound in the interim, it would be well advised to

Answer 4

Buy pounds in the forward exchange market.

Question 5

A corporation issued a property dividend to its shareholders. The dividend was distributed in the form of 100% of the common stock of a subsidiary. This is known as a

Answer 5

Spin-off

Question 6

An electronics manufacturer has subsidiaries in several international locations and is concerned about its exposure to foreign exchange risk. In countries where currency values are likely to fall, the manufacturer should not

Answer 6

grant trade credit whenever possible

Extension of credit in a foreign currency would result in receiving payment in less valuable dollars if the foreign currency became less valuable. Thus one would not want to encourage granting trade credit in a foreign country when the country’s currency is expected to lose value.