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Suggested answers to case study discussion questions
Brussels Sprouts a New Currency: €: As a Japanese citizen, you start with Japanese yen. When
you travel to each of these countries, you will need some local currency to spend during your
travel. You are probably happy that the euro exists. Before the euro was created, you would need
to exchange your yen for three different currencies—French francs, Italian lira, and Slovenian
tolars—during your travel, and, after you left each country, you would have to exchange any
remaining amounts of that country’s currency for the next country’s currency or for yen. Now,
each country uses the euro, so you only need to make one conversion, from yen to euros, as you
begin your travel, and one conversion back to yen when you complete the travel. A major
advantage of the euro is that it reduces currency-exchange transactions costs.
Foreign Exchange Trading: In Europe there is one major location for foreign exchange trading,
London. In America (really, the Americas, or the Western Hemisphere) there is one major
location, New York. Asia is different, it has three locations that are all about equal in size—
Tokyo (Japan), Singapore, and Hong Kong. Foreign exchange trading is a business that seems to
benefit from external scale economies (discussed in Chapter 6), as shown by the clustering of
trading in banks in each of London and New York. London dominates foreign exchange trading
in Europe, with its time zones of overlapping banking hours, and New York dominates foreign
exchange trading in the Western Hemisphere, with its time zones of overlapping banking hours.
Because external scale economies seem to be important in this industry, it is surprising that no
one location has come to dominate foreign exchange trading in Asia, with its time zones of
overlapping banking hours.
Suggested answers to end of chapter questions and problems
1. Imports of goods and services result in demand for foreign currency in
the foreign exchange market. Domestic buyers often want to pay using
domestic currency, while the foreign sellers want to receive payment in
their currency. In the process of paying for these imports, domestic
currency is exchanged for foreign currency, creating demand for foreign
2. Exports of merchandise and services result in supply of foreign currency in the foreign
exchange market. Domestic sellers often want to be paid using domestic currency, while
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3. a. The value of the dollar decreases. (The SFr increases.)
b. The value of the dollar decreases. (This is the same change as in part
a.)
c. The value of the dollar increases. (The yen decreases.)
d. The value of the dollar increases. (This is the same change as in part
c.)
4. The U.S. firm obtains a quotation from its bank on the spot exchange rate for buying yen
with dollars. If the rate is acceptable, the firm instructs its bank that it wants to use dollars
5. The British bank could use the interbank market to nd another bank
that was willing to buy dollars and sell pounds. The British bank could
6. The trader would seek out the best quoted spot rate for buying euros with dollars, either
by using the services of a foreign exchange broker or through direct contact with traders
7. a. Demand for yen. The Japanese rm will sell its dollars to obtain yen.
130
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
b. Demand for yen. The U.S. import company probably begins with dollars,
c. Supply of yen. The Japanese importer probably begins with yen, and the
d. Demand for yen. The U.S. pension fund must sell its dollars to obtain
8. a. The cross rate between the yen and the krone is too high (the yen value of the krone is too
high) relative to the dollar-foreign currency exchange rates. Thus, in a profitable
b. Selling kroner to buy yen puts downward pressure on the cross rate (the yen price of
9. a. Increase in supply of Swiss francs reduces the exchange-rate value
b. Increase in supply of francs reduces the exchange-rate value ($/SFr) of
c. Increase in supply of francs reduces the exchange-rate value ($/SFr) of
d. Decrease in demand for francs reduces the exchange-rate value ($/SFr)
10. a. The increase in supply of Swiss francs puts downward pressure on the exchange-rate
b. The increase in supply of francs puts downward pressure on the exchange-rate value
131
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
c. The increase in supply of francs puts downward pressure on the exchange-rate value
d. The decrease in demand for francs puts downward pressure on the exchange-rate value
11. Yes. State both exchange rates in the same way and then buy low, sell
high. Bank A is quoting a rate of 0.67 Swiss franc per dollar (= 1/1.50),
12. Let’s look at the foreign exchange market as a market for buying and selling dollars (in
exchange for dinars), so we can use the exchange rate as it is quoted. The central or par
value for the fixed rate is 5 dinars per dollar. The band is 2 percent above or below the
central rate, so the exchange rate value is permitted to vary between 4.9 dinars per dollar
132
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
forwarded, distributed, or posted on a website, in whole or part.
133
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
