Answered: 1.)The rise of globalization is due to…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1.)The rise of globalization is due to the many companies that have become multinational corporations for various reasons—for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well—for example, political risk and exchange rate risk.

Several factors affect the exchange rate of a currency with another currency. Which of the following statements are true about the factors that have an impact on exchange rates? Check all that apply.

a.)If the demand for a currency increases, the currency’s value will increase relative to other currencies.

b.)If a government intends to prevent its currency’s value from falling relative to other currencies, it will purchase its currency from sellers in the market.

c.)When a government limits imports and restricts foreign exchange transactions, its currency’s value tends to increase relative to other currencies.

d.)An increase in inflation tends to increase the currency’s value with respect to other currencies with lower inflation.

The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following:

Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$):

	Spot Exchange Rate	One-Year Forward Exchange Rate
Canadian dollar (U.S. dollar/Canadian dollar)	0.8842	0.9001

2.)The current one-year interest rate on U.S. Treasury securities is 7.35%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk?

a.)4.36%

b.)5.72%

c.)5.45%

d.)6.00%

3.)Interest rate parity recognizes that when you invest in a country other than your home country, two factors affect your investment—returns on the investment itself and changes in the exchange rate. Which of the following would cause the overall return on your investment to be higher than the investment’s stated return?

a.)The currency in which the investment is denominated appreciates relative to your home currency.

b.)Your home currency appreciates relative to the currency in which the investment is denominated.

c.)The currency in which the investment is denominated depreciates relative to your home currency.

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