Dollar on the foreign exchange markets


Problem:

You are the international manager of a US business that has just invented a revolutionary new personal computer that can perform the same functions as PCs, but costs only half as much to manufacture. Your CEO has asked you to decide how to expand into the European Union market. Your options are to export from the United States to license a European firm to manufacture and market the computer in Europe to set up a wholly owned subsidiary in Europe. Evaluate the pros and cons of each alternative and suggest a course of action to your CEO

Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the United States is $2.80 per pound and in Britain it is ₤3.70 per pound. According to PPP theory, what should the dollar/pound spot exchange rate be? Suppose the price of beef is expected to rise to $3.10 in the United States and to ₤4.65 in Britain. What should the one-year forward dollar/pound exchange rate be? Given your answers to parts a and b, and given that the current interest rate in the United States is 10%, what would you expect the current interest rate to be in Britain?

You manufacture wine goblets. In mid-June you receive an order for 10,000 goblets from Japan. Payment of ¥400,000 is due in December. You expect the yen to rise from the present rate of $1 = ¥130 to $1 = ¥100 by December. You can borrow yen at 6% a year. What should you do?

You are CFO of a U.S. firm whose wholly owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of your analysts told you that the Mexican peso is expected to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year. What actions, if any, should you take?

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Finance Basics: Dollar on the foreign exchange markets
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