Question 1

Which of the following is correct? The dominant currency of the Eurocurrency markets is the&#10;A) U.S. dollar&#10;B) Euro&#10;C) Yen&#10;D) British pound

Accepted Answer

The dominant currency of the Eurocurrency markets is the U.S. dollar. This is because the U.S. dollar is the most widely used currency for international transactions and reserves, making it the primary currency in the Eurocurrency market.

Question 2

Which of the following is correct? If the current 180-day interbank Eurodollar rate is 5% (all rates are stated on an annualized basis) and next period's LIBOR is 3%, then a Eurocurrency loan priced at LIBOR plus 1% will cost

A) 6% this period and 6% next period
B) 5% this period and 4% next period
C) 6% this period and 4% next period
D) 5% this period and 5% next period

6% this period and 4% next period

Accepted Answer

The loan cost this period is based on the current Eurodollar rate (5%) plus the spread (1%), totaling 6%. Next period, the cost is based on the next period's LIBOR (3%) plus the spread (1%), totaling 4%.

Question 3

Which one of the following would NOT be an appropriate response for a Eurozone exporter to appreciation of the euro?&#10;A) raise the foreign currency price if the euro appreciation was expected to be temporary and the cost of regaining market share was minimal&#10;B) move some production offshore if the appreciation were expected to persist for an extended period&#10;C) keep the foreign currency price constant if demand is quite elastic&#10;D) lower the foreign currency price if demand is inelastic for the product

Accepted Answer

When demand is inelastic, consumers are less sensitive to price changes, so lowering the foreign currency price would not significantly increase quantity demanded and could unnecessarily reduce the exporter's revenue.

Question 4

Suppose McDonald's charges MYR 25 for a burger in Kuala Lumpur. Its costs are MYR 18 per burger and these costs are not expected to change with the exchange rate. If the ringgit devalues from $0.107 to $0.096, what price will McDonald's have to charge for its burgers to maintain its U.S. dollar profit margin?

A) MYR 25.80
B) MYR 27.86
C) MYR 22.43
D) MYR 24

Accepted Answer

(25 - 18) × .107 / .096 + 18 = 25.80

Question 5

Suppose Laforge is selling wines to Brazil for reals 5,500 when the exchange rate is R 1 = &#8364;0.68. If the real rises to &#8364;0.71, what price must Laforge charge to maintain its unit revenue in euros?&#10;A) R 5,147&#10;B) R 6,361&#10;C) R 5,743&#10;D) R 5,268

Accepted Answer

5,500 × .68 / .71 = 5,268

Question 6

Following a devaluation of the Brazilian real, which of the following products sold in Brazil is most likely to bear a reals price increase?&#10;A) Hyndai automobile, sold to the low end of the market&#10;B) Kentucky Fried Chicken dinner, facing competition from local fast food restaurants&#10;C) IBM mainframe computer, whose only competition comes from other American computer companies&#10;D) shirts from Hong Kong, facing competition from local manufacturers

Accepted Answer

Devaluation of the Brazilian real makes imported goods more expensive in local currency terms. Since IBM mainframe computers are imported and face competition only from other American companies (which would also be affected by the devaluation), their price in reals is most likely to increase significantly. Other options involve either local competition, which could help keep prices down, or products from different international sources, which might not be affected in the same way.

Deck 5: International Financial Markets and Economic Exposure