Question 1

Suppose Apple is selling Macintosh computers in Germany in 1990 for DM 5,500 when the exchange rate was DM 1 = $0.68. If the DM rises to $0.71, what price must Apple charge to maintain its dollar unit revenue?

Accepted Answer

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Question 2

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?

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Question 3

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

Accepted Answer

A depreciation of the dollar makes U.S. goods cheaper for foreign buyers, increasing demand for products like Chevrolet automobiles with highly price elastic demand, as consumers are more responsive to price changes.

Question 4

Shorter product cycles can improve currency risk management by allowing the firm to

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Question 5

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

With the recent appreciation of the dollar, P & W's engines would become more expensive for foreign buyers. In order to remain competitive, P & W should focus on accelerating their R&D spending and cost-cutting efforts to improve their efficiency and reduce manufacturing costs. This would allow them to maintain the quality of their products while keeping prices competitive. Shifting production abroad or raising foreign currency prices are not ideal solutions as they may lead to higher costs and/or decreased sales. Buying dollars forward is a financial strategy that could help mitigate the effects of currency fluctuations, but it's not directly related to jet engine manufacturing.

Question 6

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 7

S. exporter that anticipates an appreciation of the dollar should

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Question 8

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 9

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?

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Question 10

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?

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Quiz 10: Measuring and Managing Economic Exposure