PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 27, Problem 22PS
Summary Introduction
To discuss: The affects on each firm when the value of euros falls and the way the firms can hedge itself from exchange risk
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The pressures on the foreign exchange market are such that they cause the British pound to depreciate against the US dollar. If the British pound tries to maintain the exchange rate against the US dollar, which of the following pressures will stop the pressure to devalue the British pound?
a. Britain has to sell pounds to buy dollarsb. Britain will have to increase its money supply to create a domestic product
c. Britain must buy pounds and sell dollarsd. Britain should do nothing as a fixed interest rate does not change
Suppose the Japanese government pegs the yen to the U.S. dollar. What could the Japanese central bank do to prevent
depreciation of the yen against the dollar in the foreign exchange market?
It would lower interest rates to discourage exports to the United States.
It would increase its official reserve holdings by buying dollars in the foreign exchange market.
It would print new yen currency notes and exchange them for Japanese government bonds in an open market operation.
It would buy yen and sell dollars in the foreign exchange market.
Suppose a U.S. firm builds a factory in China, staffs it with Chinese workers, uses materials supplied by Chinese companies, and finances the entire operation with a loan from a Chinese bank located in the same town as the factory. This firm is most likely trying to greatly reduce, or eliminate, which one of the following?
Interest rate disparities
Short-run exposure to exchange rate risk
Long-run exposure to exchange rate risk
Political risk associated with the foreign operations
Translation exposure to exchange rate risk
Chapter 27 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 27 - Exchange rates Look at Table 27.1. a. How many...Ch. 27 - Exchange rates Table 27.1 shows the 3-month...Ch. 27 - Prob. 3PSCh. 27 - Prob. 4PSCh. 27 - Prob. 5PSCh. 27 - Prob. 6PSCh. 27 - Prob. 8PSCh. 27 - Prob. 9PSCh. 27 - Prob. 10PSCh. 27 - Currency risk Companies may be affected by changes...
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- Suppose that Cloudastries Bank is a U.S.-based financial intermediary that serves the foreign exchange market. Assume that this bank is willing to both purchase and sell currency for the same rate. In other words, assume there is no bid/ask spread. Suppose Cloudastries has made the following direct quotations: Currency Mexican Peso Euro Dollar Spot Rate $0.40 $1.60 Additionally, Cloudastries has quoted a cross exchange rate of 1 euro = 4.01 pes After exchanging dollars for euros, the next step in triangular arbitrage is to excl If you use all 6,250.00 to purchase pesos from Cloudastries, you would receive 40,106.42 64,160.00 100,250.00 25,062.50 ros for pesos. pesos.arrow_forwardA multinational corporation based in the United States expects to receive a large payment in euros from its European client in six months. The corporation wants to hedge against potential depreciation of the euro. Which specific forward contract(s) could the company use to mitigate the currency risk? Select all that apply: Buy U.S. dollars forward against euros Sell U.S. dollars forward against euros Buy euros forward against U.S. dollars Sell euros forward against U.S. dollarsarrow_forwardIf the U.S. dollar were to appreciate substantially, what steps could a domestic manufacturer such as Cummins Engine Co. of Columbus, Indiana, take in advance to reduce the effect of the exchange rate fluctuation on company profitability?arrow_forward
- If the United States imports more goods from abroad than it exports, thenforeigners will tend to have a surplus of U.S. dollars. What will this do tothe value of the dollar with respect to foreign currencies? What is the corresponding effect on foreign investments in the United States?arrow_forwardConsider a U.S. firm that deals in only one foreign currency, the peso. Fill in the blanks to describe the economic exposure of the firm to changes in the value of the peso. If the peso depreciates, interest from investments in Mexico will likely investments will If the peso depreciates, the in borrowed funds from Mexico increases However, if the peso appreciates, interest from those decreases on borrowed funds from Mexico However, if the peso appreciates, the interest owed onarrow_forwardA U.S. parent firm has a subsidiary using euro. The manager of the parent firm should understand that ___________ is economically beneficial to the parent firm. A. weakening euro B. stable euro currency C. stable US dollar D. strengthening euroarrow_forward
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