Reading 70: LOS k ～ Q1- 3 collected, between, dollars, percent

spaceedu

1.Consider a Canadian firm that exports hockey sticks to the U.S. Prices are set and collected in U.S. dollars. The inflation differential between Canada and the U.S. is 2 percent (Canadian inflation minus U.S. inflation). What is the valuation impact on the Canadian exporter if the value of the Canadian dollar falls by 2 percent during the next year?

A)   The firm is hurt by the falling value of the Canadian dollar.

B)   All currency changes are nominal, so the change has no real impact.

C)   The firm is helped by the falling value of the Canadian dollar.

D)   As the Canadian dollar falls, the firm will cut its U.S. dollar prices.

2.Suppose an analyst is assessing the currency exposure of a French firm that imports bicycles from the U.K. If the value of the British pound appreciates, will the French firm’s cost structure improve or deteriorate? Why?

A)   Deteriorate, because the French cost of imported bicycles will go down.

B)   Deteriorate, because the French cost of imported bicycles will go up.

C)   Improve, because the French cost of imported bicycles will go up.

D)   Improve, because the French cost of imported bicycles will go down.

3.Suppose the value of the euro depreciates by 5 percent in real terms. Of the following firms, which will most likely be hurt by the change in the euro? (The euro is used as the official currency in France and the pound is used in the U.K.) A:

A)   French firm that imports and resells computers in France.

B)   U.K. firm that imports food from French suppliers.

C)   French firm that exports food to U.K. distributors.

D)   French firm that manufactures and sells scooters in France.

spaceedu

1.Consider a Canadian firm that exports hockey sticks to the U.S. Prices are set and collected in U.S. dollars. The inflation differential between Canada and the U.S. is 2 percent (Canadian inflation minus U.S. inflation). What is the valuation impact on the Canadian exporter if the value of the Canadian dollar falls by 2 percent during the next year?

A)   The firm is hurt by the falling value of the Canadian dollar.

B)   All currency changes are nominal, so the change has no real impact.

C)   The firm is helped by the falling value of the Canadian dollar.

D)   As the Canadian dollar falls, the firm will cut its U.S. dollar prices.

The correct answer was B)

The change in the valuation of the currency is fully explained by the inflation differential. Hence, there should be no impact on the valuation of the firm in real terms.

2.Suppose an analyst is assessing the currency exposure of a French firm that imports bicycles from the U.K. If the value of the British pound appreciates, will the French firm’s cost structure improve or deteriorate? Why?

A)   Deteriorate, because the French cost of imported bicycles will go down.

B)   Deteriorate, because the French cost of imported bicycles will go up.

C)   Improve, because the French cost of imported bicycles will go up.

D)   Improve, because the French cost of imported bicycles will go down.

The correct answer was B)

If the pound appreciates, then bicycles imported from the U.K will be more expensive in France. Hence, the cost structure of the French bicycle importer will deteriorate.

3.Suppose the value of the euro depreciates by 5 percent in real terms. Of the following firms, which will most likely be hurt by the change in the euro? (The euro is used as the official currency in France and the pound is used in the U.K.) A:

A)   French firm that imports and resells computers in France.

B)   U.K. firm that imports food from French suppliers.

C)   French firm that exports food to U.K. distributors.

D)   French firm that manufactures and sells scooters in France.

The correct answer was A)

The firm that imports and resells goods in France, which uses the euro, will be the firm most hurt by the depreciation of the euro.