Question

Which of the following statement is incorrect? Select one:

a. Calvin Klein, Liz Claiborne, The Gap, and other garment industry companies that manufacture clothing outside of the United States to control labor costs must balance the moral issues of human rights against their obligations to stockholders.

b. Psychological and political factors also affect exchange rates.

c. Most of the answers are correct.

d. When the U.S. dollar strengthens against the Mexican peso, U.S. importers of Mexican goods will require more dollars to purchase Mexican goods that are sold in pesos.

e. The risk that a multinational corporation faces due to fluctuating exchange rates can be managed by using forward contracts, futures contracts, and currency swaps.

Answer 1

Only statement d.) is incorrect. The inverse is actually true.

If the U.S. dollar strengthens against the Mexican peso, it also means the Mexican peso is weakening against the U.S. dollar. When a country's currency weakens relative to the currency of another country, imported goods become more expensive for the citizens of the country with the weakened currency. In this case, Mexican importers of U.S. goods will require more pesos to purchase U.S. goods that are sold in dollars.

Let us take an example,

The initial exchange rate between Mexican pesos and U.S. dollars is 10 pesos per dollar.

The U.S. importer used to import Mexican lime for 10 pesos per pound. So his cost is $1.

The Mexican importer used to import Apples from the U.S. for $1 per pound. So his cost is 10pesos.

Now the U.S. Dollar strengthens against the Mexican pesos and the new exchange rate is 12 pesos per dollar.

So, for the U.S. importer, his new cost will be $0.84 and for the Mexican importer, new cost will be 12 pesos.

Hope this helps :)