General Motors exports cars to Spain but the strong dollar against the euro hurts sales ofGM cars in Spain. In the Spanish market, GM faces competition from the Italian and Frenchcar makers, such as Fiat and Renault, whose operating currencies are the euro. What kind ofmeasures would you recommend so that GM can maintain its market share in Spain.

Foreign exchange- Foreign exchange is the conversion of one currency into another at a specific rate…

Answered: General Motors exports cars to Spain…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The small happy Kingdom of Pollyanna does not trade with the rest of the world, but uses U.S dollars for its currency. Its domestic price of tofu is $1 per pound and the Kingdom produces and consumes 5 tons of tofu. The world price of tofu is just $0.50 per pound. At this price, the Kingdom would produce only 2 tons of tofu and would consume 8 tons of tofu, and thus have to import 6 tons of tofu. Suppose the Kingdom decides to open up to trade, but imposes a tariff of 0.25/lb on all imports of tofu. How much money does the Kingdom collect from this tariff? (Note: 1 ton = 2000 lbs.)
Why do governments intervene in the foreign exchange market? Check all that apply: To maintain exchange rate boundaries To reduce fear in financial markets To smooth out the business cycle To smooth out exchange rate movements To earn a profit for the government
If a U.S.-based MNC focused completely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time. Group of answer choices True False
There is an ongoing debate between US and China regarding weather the Chinese Yuan's value should be revalued upward. The cost of labor in china is substantially lower than that in the U.S. Would the U.S. balance of trade deficit in China be eliminated if the Yuan was revalued upward by 20%? by 40%? by 80%?
The Japanese yen increases in value relative to the dollar, moving from 120 yento 110 yen to each U.S. dollar. From the perspective of a U.S. firm that produces in the UnitedStates and exports its product to sell in Japan:a. This is bad news.b. It doesn’t matter.c. This is good news
The U.S. dollar, Norwegian krone, Swiss franc and Japanese yen often are labelled “haven currencies.” During times of international stress, each of these currencies typically can be expected to: (a) depreciate; (b) appreciate; (c) be devalued; (d) yield fewer units of foreign currencies when traded in open markets.
Suppose a U.S. multinational company needs to buy Canadian dollar but the exchange rate between US dollar and Canadian dollar is not favorable for the company because of high bid-ask spread. However, the currency pair between Canadian dollar and Japanese Yen is favorable due to its low bid-ask spread. So, you want to find the cross-exchange rate between Canadian dollar and Japanese Yen. Assume the Canadian dollar is equal to $.76, and the Japanese Yen is equal to $.007. The value of the Canadian dollars is Japanese Yen. 93.67 108.57 164.54 118.34 27
Singapore through Pacific Oil imports tons of crude petroleum from neighbouring country Malaysia annually to manage the high consumption demand in the country and abroad. However, top management in Pacific Oil is not comfortable with the idea of using derivatives as a way to manage the transaction exposure. (i) Theoretically, why do the top management in Pacific Oil are not in favour in using derivative to manage the transaction exposure? (ii) Describe other strategies to manage the transaction exposure.
Following an unanticipated dollar appreciation, would you recommend that a domestic manufacturing company such as Cummins Engine sell foreign assets? Yes or No
2. Years ago, an apple producer argued that the United States should enact a tariff, or a tariff, or a tax, on imports of bananas. His reasoning was that "the enormous imports of cheap bananas into the United States tend to curtails the domestic consumption of fresh fruits produced in the United States." (a) Was the apple producer assuming that apples and bananas are substitutes or complements? Briefly explain. (b) If a tariff on bananas acts as an increase in the cost of supplying bananas in the United States, use two demand and supply graphs to show the effects of the apple producer's proposal. (i) One graph should show the effect on the banana market in the United States, and (ii) the other graph should show the effect on the apple market in the United States. Label the change in equilibrium price and quantity in each market and any shifts in the demand and supply curves.
Which of the following is an example of managing economic exposure by flexible sourcing policy? An American company sells its products in Brazil and Portugal. Reduced sales in Brazil due to the dollar appreciation against the “real” can be compensated by increased sales in Portugal due to the dollar depreciation against the euro. If yen is strong, it is preferable for a Japanese company to open a manufacturing subsidiary in the U.S. to produce and sell its products there. An American IT company hires software developers in Ukraine because of the weak position of grivna against dollar. A Canadian company spends a lot of money for research & development activities to improve its reputation and gain more customers.
Suppose that Salem Co, a U.S.-based MNC that both purchases supplies from Canada and sells exports in Canada, is seeking to measure the economic exposure of its cash flows. Salem wishes to analyze how its cash flows might change under different exchange rates for the Canadian dollar (the only foreign currency in which it deals). Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios. The following table shows Salem’s cash flows under each of these exchange rates. Use the table to answer the question that follows. Exchange Rate Scenario Exchange Rate Scenario Exchange Rate Scenario C$1=$0.70 C$1=$0.75 C$1=$0.80 (Millions) (Millions) (Millions) Sales (1) U.S. Sales $315 $315 $315 (2) Canadian Sales $3.50 $4.00 $4.00 (3) Total Sales in U.S. $ $318.50 $318.75 $319.00 Cost of Materials and Operating Expenses (4)…

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