Andrea Holmes

1/14/2020

Chapter 4: Questions 2, 9 16, and Small Business Dilemma (SBD)

Chapter 5: Questions 19, 20, and SBD
Chapter 6: Questions 1, 3, 4, and SBD

Chapter 4
Question 2
a As U.S. consumers
increasingly desire to buy
Canadian goods and
services for a cheaper
price, the demand for
Canadian dollars should
increase.

b The supply of Canadian dollars would decrease as consumers prefer to purchase

c The value of the Canadian dollar would increase as the dollar appreciates.

Question 9
The Canadian dollar value will depreciate
against the U.S. dollar and Japanese Yen as
interest rates decline. There may also be an
increase in capital flows from Canada to the
U.S. U.S investors may attempt to take
advantage of higher interest rates in the U.S.
while reducing investments of securities in
Canada. Accordingly, Japanese investors that
invested in Canada's economy will seek out
U.S. investments.

Question 16
The potential impact of a weakened US
economy, would result in a decrease in
demand of foreign products. This negative
impacts also affects foreign currencies. The
lower U.S. interest rates would reduce capital
flows to the U.S. this reduction creates
higher inflation.

Small Business Dilemma

Question 1 Britain's inflation rate is
expected to increase
resulting in pound
depreciation. Thus,
causing a change in trade
flows that also negatively
affect's the value of the
pound. Interest rate
movements are expected
to be the same in both
countries, causing no
effect on capital flows.

Question 2
Since the British pound is depreciating, there
will be unfavorability of Sports Exports
Company's goods.

Chapter 5
Question 19
Possible spot rate of Canadian dollar on expiraNet profit (loss) per unit to LSU corporation if spot rate occurs
0.76 $ (0.02)
0.78 $ 0.00
0.8 $ 0.02
0.82 $ 0.04
0.85 $ 0.07
0.87 $ 0.09

Question 20
Possible spot rate of C$ at expiration Net Profit(loss) per unit at possible spot rate
0.76 $ 0.08
0.79 $ 0.05
0.84 $ -
0.87 $ (0.02)
0.89 $ (0.02)
0.91 $ (0.02)

Small Business Dilemma

Question 1
Futures contracts trade on exchanges and
are used for hedging. In this scenario, Sports
Exports can hedge exchange rate risks by
using futures contracts. The company can sell
futures in pounds with the maturity date of
receivables. Since , futures contracts are
standardized in size, limitations may affect
the hedging process required under Sports
Exports Company.

Question 2
Currency options are flexible enough to
hedge risk. Call options and put options can
be utilized to hedge against the volatility of
exchange rate movements. Sports Exports
Company can hedge against exchange rate
risk by buying put options in pounds. This
gives the power to sell a set amount of
British pounds at a specific exchange rate at
a specific point in time.

Question 3
The number of units for option contracts are
limited, or standardized so they will not
match the specific amound of pounts that
the business has to sell each month.
Government can also put straineous
regulations on exercising of options. In
addition, the risks can be diversified through
currency options but no eliminated.

Question 4
Jim may consider purchasing put options to
gain flexibility; however, the premium must
be paid to purchase options . If futures
contracts are purchased premium aren't
required to be paid.

Chapter 6
Question 1
Advantages of a free floating exchange rate
system inclde government intervention
would not occur unlike under a fixed
exchange rate system, government regulates
by placing a set percentage on the intial
value of the exchange rate. For investors
benefits, under a managed float system, the
government only intervenes when necessary
becuase rates move according to market
forces. Freely floating exchange rate systems
control or correct balance of trade deficits
since the currencies adjust according to
market forces. The downside of a freely
floating exchange rate system is that firms
are exposed to exchange rate risk. Floating
rates can also negatively affect inflation or
unemployment rates.

Question 3
Central banks pose an upward pressure on
currencies by purchase big quantities of a
specific currency in the foreign exchange
market with their currency reserves. To
impose currency depreciation, they fllod the
market with a particular currency. Central
bank intervention smoothes the exchange
rate movements to stabilize the economy
and market forces. Sudden currency values
changes creates votality uin business cycles
causing disruptions in the financial markets.

Question 4
To increase the value of the local currency,
central banks drives up interest rate,
therewith, attracting higher foreign demand
of the local currency to purchase high yield
securities. To place downward pressure on its
local currency, central banks lower interest
rates to reduce demand.

Small Business Dilemma

Question 1
The value of British pounds will weaken if the
Bank of England flows the pounds into
foreign exchange market. The downward
pressure would create an overwhelming
conflict on economic factors.

Question 2
Flooding the foreign exchange market will
create a downward pressue on the value of
the company's performance in the market. A
weakened pound will decrease profits
related to exports into the British market.
 as consumers prefer to purchase their own local goods and services.
e as the dollar appreciates.
pot rate occurs
Algeria's financial supply is heavily reliant on oil and gas production. Since the new election of Tebboune as president, the cou
ebboune as president, the country plans to revive its oil and gas sector with new foreign investments. It is imperative that Algeria diversify
perative that Algeria diversify its' economy to boost the economy. "A new hydrocarbons law, which offers more attractive terms to poten
more attractive terms to potential foreign investors, was passed." (Elliott, Gupte) This law allows the country to expand its hydrocarbon pro
to expand its hydrocarbon production.