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FIN Week 2 Homework

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Chapter 2 Homework: p. 56-57 Questions 1, 5, 13, 15 1. Balance of Payments a) Of what is the current account generally composed? b) Of what is the capital account generally composed? 5. Exchange Rate Effect on Trade Balance Would the U.S. balance-of-trade deficit be larger or smaller if the dollar depreciates against all currencies, versus depreciating against some currencies but appreciating against others” Explain. 13. Exchange Rate Effects on Trade a. Explain why a stronger dollar could enlarge the U.S. balance-of-trade deficit. Explain why a weaker dollar could affect the U.S. balance-of-trade deficit. b. It is sometimes suggested that a floating exchange rate will adjust to reduce or eliminate any current account deficit. Explain why this adjustment would occur. c. Why does the exchange rate not always adjust to a current account deficit? 15. China-U.S. Balance of Trade There is an ongoing debate between the United States and China regarding whether the Chinese yuan’s value should be revalued upward. The cost of labor in China is substantially lower than that in the United States. a. Would the U.S. balance-of-trade deficit in China be eliminated if the yuan was revalued upward by 20 percent? Or by 40 percent? Or by 80 percent? b. If the yuan was revalued to the extent that it substantially reduced the U.S. demand for Chinese products, would this shift the U.S. demand toward the United States or toward other countries where wage rates are relatively low? In other words, would the correction of the U.S. balance-of-trade deficit have a major impact on U.S. productivity and jobs? Chapter 3 Homework: p. 93-95 Questions 4, 15, 18, 22 4. Exchange Rate Effects on Borrowing Explain how the appreciation of the Japanese yen against the U.S. dollar would affect the return to a U.S. firm that borrowed Japanese yen and used the proceeds for a U.S. project. 15. Evolution of Floating Rates Briefly describe the historical developments that led to floating exchange rates as of 1973. 18. Foreign Exchange You just came back from Canada, where the Canadian dollar was worth $.70. You still have C$200 from your trip and could exchange them for dollars at the airport, but the airport foreign exchange desk will only buy them for $.60. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for $.10 per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C$200 for 1,300 pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain. 22. International Financial Markets Walmart has established two retail outlets in the city of Shanzen, China, which has a population of 3.7 million. These outlets are massive and contain imports in addition to products purchased locally. As Walmart generates earning beyond what it needs in Shanzen, it ma remit those earnings back to the United States. Walmart is likely to build additional outlets in Shanzen or in other Chinese cities in the future. a. Explain how the Wal-Mart outlets in China would use the spot market in foreign exchange. b. Explain how Walmart might use the international bond market when it is establishing other Walmart stores in Asia. c. Explain how Wal-Mart could use the international bond market to finance the establishment of new outlets in foreign markets.

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