Question 1

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

Accepted Answer

The answer of Suppose McDonald's charges Ptas.25 for a burger...

Question 2

The appropriate response for a U.S.exporter to depreciation of the dollar would be to

Accepted Answer

If the depreciation of the dollar is expected to be temporary, the exporter can raise the foreign currency price to maintain profit margins. However, if the cost of losing market share is minimal, the exporter can avoid raising prices and still maintain demand. Lowering prices constantly may not be a sustainable option as it could lead to lower profits in the long run. Moving production offshore might not be a feasible option for all exporters. Setting up a netting center in the home country is not necessarily relevant to responding to the depreciation of the dollar.

Question 3

Following a devaluation of the Greek drachma,which of the following products sold in Greece is most likely to bear a drachma price increase?

Accepted Answer

A devaluation of the Greek drachma would make imports more expensive. Since IBM mainframe computers are imported and face no local competition, their prices in drachmas are most likely to increase significantly.

Question 4

Which one of the following would not be an improvement from shorter product cycles to improve currency risk management- It would allow the firm to

Accepted Answer

The answer of Which one of the following would not...

Question 5

A U.S.exporter that anticipates an appreciation of the dollar should

Accepted Answer

The answer of A U.S.exporter that anticipates an appreciation of...

Question 6

Suppose Apple is selling Macintosh computers in 1996 in Germany for DM 5,500 when the exchange rate is DM 1 = $0.68.If the DM rises to $0.71,what price must Apple charge to maintain its dollar unit revenue?

Accepted Answer

The answer of Suppose Apple is selling Macintosh computers in...

Question 7

In the face of an appreciating yen,Toyota should consider

Accepted Answer

Investing in U.S. production facilities would allow Toyota to produce cars in a region where the yen's appreciation would not have as great an impact on costs. Additionally, increasing research and development investment would allow Toyota to stay competitive by developing new technologies and improving efficiency in production. Focusing on the low end of the market may not be as effective as Toyota's brand is associated with quality and reliability, rather than low cost.

Question 8

Which of the following products is most likely to benefit from depreciation of the U.S.dollar?

Accepted Answer

A Chevrolet automobile with highly price elastic demand would benefit from a weaker U.S. dollar because it would make the car cheaper for foreign buyers, potentially increasing sales.

Question 9

Jet engine manufacturing entails enormous economies of scale.Pratt & Whitney,a large U.S.jet engine producer,faces substantial competition from Rolls-Royce,the British engine manufacturer.What would be the BEST way for P & W to cope with a dollar that has recently appreciated by 50%?

Accepted Answer

The answer of Jet engine manufacturing entails enormous economies of...

Question 10

A company producing a differentiated product and competing with internationally diversified competitors will face a relatively __ price elasticity of demand for its products and possess a relatively ___ degree of pricing flexibility.

Accepted Answer

When a company produces a differentiated product, it has a certain level of pricing power and pricing flexibility. However, when it competes with internationally diversified competitors, its pricing power and degree of flexibility decrease. This is because in such a competitive environment, customers have a greater range of substitute products to choose from, which makes the demand for its products relatively inelastic. Therefore, the company will have to be cautious when setting prices and may not have as much flexibility to increase prices without losing customers to its competitors. Hence, the company will face a relatively low price elasticity of demand for its products and possess a relatively high degree of pricing flexibility.

Question 11

When we examine operating exposure,the key issue for a domestic firm is its

Accepted Answer

Pricing flexibility is the key issue for a domestic firm when examining operating exposure. This is because pricing flexibility allows the firm to adjust its prices in response to changes in exchange rates and international competition. This helps the firm to maintain its competitive position and avoid losses due to currency fluctuations. Prior import competition, asset valuation adjustment, and low import content are important factors but they are not the key issue when examining operating exposure.

Question 12

Sumitomo Bank wants to expand its lending in the United States,but to do so it needs to raise more long-term debt capital to help finance these loans.Currently,long-term interest rates are 9.5% in the U.S.and 6.3% in Japan.What would you recommend Sumitomo do?

Accepted Answer

The answer of Sumitomo Bank wants to expand its lending...

Question 13

Nissan,the Japanese car manufacturer,exports a substantial fraction of its output to the United States.What financial measures would be suitable for Nissan to take to reduce its currency risk?

Accepted Answer

The answer of Nissan,the Japanese car manufacturer,exports a substantial fraction...

Question 14

For the strategy of product shifting to succeed,it is assumed the MNC has collected

Accepted Answer

Product shifting involves the transfer of production from one facility to another in different geographic locations. To do this, the MNC must have a portfolio of production facilities worldwide to choose from. Having a diverse portfolio of factories allows the MNC to leverage the benefits of each location, including lower costs, favorable regulations, and specific skill sets. The other options (B, C, and D) may support the MNC's operations, but are not directly related to the strategy of product shifting.

Question 15

Volkswagen almost went bankrupt in 1973 because

Accepted Answer

Volkswagen almost went bankrupt in 1973 due to its failure to offset the exchange risk between its cost structure, which was in deutschemarks, and its revenue structure, which was largely in dollars, without a suitable liability structure to mitigate this risk.

Quiz 11: Measuring and Managing Economic Exposure