5.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 appreciated against
others?  Explain.  (Chapter 2, Question 5)

 If the dollar weakens against all currencies, the U.S. balance of trade deficit will likely be
smaller.  Some U.S. importers would have more seriously considered purchasing their goods
in the U.S. if most or all currencies simultaneously strengthened against the dollar.
Conversely, if some currencies weaken against the dollar, the U.S. importers may have
simply shifted their importing from one foreign country to another.
 
 
 

9. When South Korea’s export growth stalled, some South Korean firms suggested
that South Korea’s primary export problem was the weakness in the Japanese yen.  How
would you interpret this statement?  (Chapter 2, Question 9)

One of South Korea’s primary competitors in exporting is Japan, which produces and
exports many of the same types of products to the same countries.  When the Japanese yen
is weak, some importers switch to Japanese products in place of South Korean
products.  For this reason, it is often suggested that South Korea’s primary export problem
is weakness in the Japanese yen.
 

12 a .Why a stronger dollar could enlarge balance of trade deficit explain why a
weaker dollar could affect the the us balance trade deficit ?

A weaker dollar tends to increase the demand for U.S. goods because the price paid for a
specified amount in dollars by non-U.S. firms is reduced. In addition, the U.S. demand for foreign
goods is reduced because it takes more dollars to obtain a specified amount in foreign currency
once the dollar weakens. Both forces tend to stimulate the U.S. economy and therefore improve
productivity and reduce unem- ployment in the United States.

A weak dollar would discourage U.S. investors from investing abroad. It can cause the investors
to purchase foreign currency (when investing) at a higher exchange rate than the exchange rate at
which they would sell the currency (when the investment is liquidated).

13. 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.

A current account deficit reflects a net sale of the home currency in exchange for other
currencies. This places downward pressure on that home currency’s value. If the currency
weakens, it will reduce the home demand for foreign goods (since goods will now be more
expensive), and will increase the home export volume (since exports will appear cheaper to
foreign countries).
8. Forward Contract. The Wolfpack Corporation is a U.S. exporter that invoices its exports
to the United Kingdom in British pounds. If it expects that the pound will appreciate
against the dollar in the future, should it hedge its exports with a forward contract?
Explain.

ANSWER: The forward contract can hedge future receivables or payables in foreign currencies to
insulate the firm against exchange rate risk. Yet, in this case, the Wolfpack Corporation should
not hedge because it would benefit from appreciation of the pound when it converts the pounds to
dollars.

17. Eurocredit Loans.

a. With regard to Eurocredit loans, who are the borrowers?
b. Why would a bank desire to participate in syndicated Eurocredit loans?
c. What is LIBOR and how is it used in the Eurocredit market?

ANSWER:
a. Large corporations and some government agencies commonly request Eurocredit loans.
b. With a Eurocredit loan, no single bank would be totally exposed to the risk that the borrower
may fail to repay the loan. The risk is spread among all lending banks within the syndicate.
c. LIBOR (London interbank offer rate) is the rate of interest at which banks in Europe lend to
each other. It is used as a base from which loan rates on other loans are determined in the
Eurocredit market.

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 130 pesos. Should you accept the offer
or cash the Canadian dollars in at the airport? Explain.

ANSWER: Exchange with the tourist. If you exchange the C$ for pesos at the foreign exchange
desk, the cross-rate is $.60/$10 = 6. Thus, the C$200 would be exchanged for 120 pesos
(computed as 200 × 6). If you exchange Canadian dollars for pesos with the tourist, you will
receive 130 pesos.

19. Aggregate Effects on Exchange Rates. Assume that the United States invests heavily in
government and corporate securities of Country K. In addition, residents of Country K
invest heavily in the United States. Approximately $10 billion worth of investment
transactions occur between these two countries each year. The total dollar value of
trade transactions per year is about $8 million. This information is expected to also hold
in the future.
Because your firm exports goods to Country K, your job as international cash manager
requires you to forecast the value of Country K’s currency (the “krank”) with respect to
the dollar. Explain how each of the following conditions will affect the value of the
krank, holding other things equal. Then, aggregate all of these impacts to develop an
overall forecast of the krank’s movement against the dollar.

a. U.S. inflation has suddenly increased substantially, while Country K’s inflation
remains low.

ANSWER: Increased U.S. demand for the krank. Decreased supply of kranks for sale.
Upward pressure in the krank’s value.

b. U.S. interest rates have increased substantially, while Country K’s interest rates
remain low. Investors of both countries are attracted to high interest rates.

ANSWER: Decreased U.S. demand for the krank. Increased supply of kranks for sale.
Downward pressure on the krank’s value.

c. The U.S. income level increased substantially, while Country K’s income level has
remained unchanged.

ANSWER: Increased U.S. demand for the krank. Upward pressure on the krank’s value.

d. The U.S. is expected to impose a small tariff on goods imported from Country K.

ANSWER: The tariff will cause a decrease in the United States’ desire for Country K’s
goods, and will therefore reduce the demand for kranks for sale. Downward pressure on
the krank’s value.