Exchange Rate and Transaction and Translation Exposure

1. Analyze the major effects that relative interest and inflation rates could have on a country’s currency. Suggest the crucial steps that a company could take in order to minimize the adverse effects of currency fluctuations.

2. Evaluate the efficiency of two (2) of the most common currencies / foreign exchange derivatives that companies use in order to minimize translation and transaction exposure. Give one (1) example of an instance where entities such as MNCs, banks, hedge funds, and insurance companies should use each derivative. Provide a rationale for your response.

3. Trade Restriction Effects on Exchange Rates. Assume that the Japanese government relaxes its controls on imports by Japanese companies. Other things being equal, how should this affect the (a) U.S. demand for Japanese yen, (b) supply of yen for sale, and (c) equilibrium value of the yen?

4. Speculative Effects on Exchange Rates. Explain why a public forecast by a respected economist about future interest rates could affect the value of the dollar today. Why do some forecasts by well respected economists have no impact on today’s value of the dollar?

5. . Interaction of Exchange Rates. Assume that there are substantial capital flows among Canada, the U.S., and Japan. If interest rates in Canada decline to a level below the U.S. interest rate, and inflationary expectations remain unchanged, how could this affect the value of the Canadian dollar against the U.S. dollar? How might this decline in Canada’s interest rates possibly affect the value of the Canadian dollar against the Japanese yen?

6. . Factors Affecting Exchange Rates. In some periods, Brazil’s inflation rate was very high. Explain why this places pressure on the Brazilian currency (called the Brazilian real).

7. Factors Affecting Exchange Rates. If Asian countries experience a decline in economic growth (and experience a decline in inflation and interest rates as a result), how will their currency values (relative to the U.S. dollar) be affected?

Chapter 5

1. Hedging With Currency Options. When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm