END-OF-CHAPTER GUIDE
*Review Questions and Answers
*Critical Discussion Questions and Answers
*Global Action
*Closing Case
REVIEW QUESTIONS AND ANSWERS
1. ON CULTURE: Suppose that in country X, the culture is one that avoids risk and frowns
on gambling. Suppose the country uses the US dollar in its international transactions, and
a firm in X buys a product from Europe, which it will take delivery in 60 days and for
which it will have to pay 100,000 euros at that time. The firm does not know how many
dollars will be needed in order to obtain those 100,000 euros 60 days from now. One way
to know that would be to enter into a contract for the future delivery of that currency with
a speculator who would guarantee the firm that it will be able to obtain those euros for a
specific dollar value. The firm would thus avoid the risk of having to pay too much for
those euros 60 days from now by transferring the risk at the present time to a speculator.
The speculator takes the risk, because he or she is expecting that the actual costs of those
euros (in terms of dollars) will be less 60 days from now than what the speculator
promises to the firm. As a result, the speculator profits from the price differential. Some
in country X view contracts for the future delivery of a currency (forward contracts) as
risk avoidance, but others view it as gambling. What do you think?
The question is intended to get students to reexamine assumptions and biases. Risk
avoidance and risk taking can be two sides of the same coin. Whether it involves
currencies, wheat, oil, or securities, values (prices, exchange rates, etc.) can change and
2. Do an online search regarding current challenges to the dollar, euro, and yen, and then
refer to PengAtlas Maps 2.1 (Top Merchandise Importers and Exporters) and 2.2 (Top
Service Importers and Exporters). To what extent do the users of these three currencies
tend to dominate world trade?
In addition to the students’ correct answers based on their observation, you might remind
them that the use of these currencies is not limited to the countries in which these
3. Refer to PengAtlas Map 2.3 (FDI Inflows and Outflows), and compare to what you
learned from Question 2 above. To what extent do the users of the three currencies
dominate? In your opinion, will the rise of the BRIC countries ultimately reduce the
dominance of those currencies?
This is an opinion question because one cannot know the future. However, stay in touch
4. What are foreign exchange rates?
Those rates are simply the price of a given currency in terms of how many units of
another currency one can obtain for a unit of that given currency. Suppose at one point in
5. How are foreign exchange rates affected by differences in the interest rates prevailing in
various countries?
Anything that increases the demand for a currency can increase the value (exchange
6. What happened toward the end of World War II that lifted the dollar to the commanding
heights of the global economy?
7. What is the IMF, and how does it help countries?
International Monetary Fund (IMF): an international organization that was established
to promote international monetary cooperation, exchange stability, and orderly exchange
8. In foreign exchange, what are spot and forward transactions? How do they differ?
A spot transaction is the classic single-shot exchange of one currency for another
What is the difference between currency hedging and strategic hedging?
Strategic hedging is conceptually different from currency hedging. Currency hedging
focuses on using forward contracts and swaps to contain currency risks, a financial
9. What is the role of currency boards regarding fixed exchange rates? Discuss at least one
problem that such boards may have in maintaining fixed rates.
The currency board maintains a fixed rate of exchange between its currency and another
currency and backs that by maintaining a supply of that currency so as to support that
11. Why is it that a strong dollar is not always desirable to the United States, while it may be
to other countries?
A strong dollar might not be desirable to the United States for three reasons. (1) US
12. Why should a savvy manager become literate about foreign exchange?
First, foreign exchange literacy must be fostered. Second, risk analysis of any country
13. What is one example that illustrates why risk analysis of a country should include its
currency risk?
For example, prior to 2008, foreign and domestic banks in emerging European countries
such as Hungary, Latvia, and Poland let numerous home buyers take out mortgage loans
denominated in the euro, while a majority of these customers’ assets and incomes were in
CRITICAL DISCUSSION QUESTIONS AND ANSWERS
1. Suppose US$1 = €0.7809 in New York and US$1 = €0.7793 in Paris. How can
foreign exchange traders profit from these exchange rates? What actions can they take
that may result in the same dollar/euro exchange rate in both New York and Paris?
Arbitrageurs (traders) profit by buying low in one market and selling high in another.
However, as they dump more of a currency into the higher priced market, they are
increasing the supply of that currency in that market and as the supply increases relative
2. Identify the currencies of the top-three trading partners of your country in the last ten
years. Find the exchange rates of these currencies, relative to your country’s currency, ten
years ago and now. Explain the changes. Then predict the movement of these exchange
rates ten years from now.
This is a question in which the answer is not as important as the thought process and the
3. As a manager, you are choosing to do business in two countries: One has a fixed
exchange rate, and the other has a floating rate. Which country would you prefer? Why?
4. ON ETHICS: You are an IMF official going to a country whose export earnings are not
able to pay for imports. The government has requested a loan. Which areas would you
recommend the government to cut: (1) education, (2) salaries for officials, (3) food
subsidies, and/or (4) tax rebates for exporters?
Student answers will vary but it is unlikely that any would pick number four. Most
GLOBAL ACTION
1. Based in the United States, your firm trades extensively in European countries
that have adopted the euro. You have been asked to evaluate the impact of
currency fluctuations on sales in this region over the past month. The first step
in this process is to develop an exchange rate table for daily exchange rates
over the past month between the U.S. dollar and the euro. Once this has been
accomplished, what general trends do you notice? How could these trends
impact your firm’s sales in countries that use the euro?
Exercise 1 Answers
One resource which can be used is “OANDA.com: The Currency Site”. This website can
be found by entering the search term “exchange rate table” at the globalEDGE™
Resource Desk search box located at http://globaledge.msu.edu/resourceDesk/. Once at
globalEDGE™ Tags: Reference, Standards and Conversions, Currency
2. Your company is examining possible market opportunities in the Asia Pacific
region. As a part of this possible strategic shift, the benchmark currencies of
the region must be identified to diversify currency risk for future operations.
Using a resource that examines foreign exchange, determine which predominant
currencies are likely candidates for your analysis.
Exercise 2 Answers
One resource which can be used is “FXStreet”. This website can be found by entering the
search term “foreign exchange” at the globalEDGE™ Resource Desk search box located
CLOSING CASE DISCUSSION GUIDE AND ANSWERS
Emerging Markets: Jobek Do Brasil’s Foreign Exchange Challenges
1. How do you evaluate Jobek’s situation from the resource-based and institution-based
views? Why have resources and institutions hindered Barny to cope with the foreign
exchange situation, but simultaneously helped him to turn his company around?
2. How do you evaluate Jobek’s strategic response to foreign exchange risks?
3. What would you do if you were Barny? Why?