One function of the foreign exchange market is to convert the currency of one country into...

One function of the foreign exchange market is to convert the currency of one country into the currency of another. A second function of the foreign exchange market is to provide insurance against foreign exchange risk. The most common approach to exchange rate forecasting is fundamental analysis. This relies on variables such as money supply growth, inflation rates, nominal interest rates, and balance-of-payment positions to predict future changes in exchange rates. Identify a country outside of the U.S. and its currency and initial exchange rate. Answer the following questions:

How stable is the currency against the U.S. dollar?

Why is this so?

How many other countries trade with your chosen host country?

Are there risks involved in doing business with this country?

What are the projections for this country’s expansion over the next 10 years?

Solutions

Expert Solution

_Answer:

Japan. Its currency is Yen. The exchange rate for 1 US Dollar to Japanse Yen is 106.88

A) The stabililty of Japanse Yen to US dollar can be easily understood from the graph below. The graph is taken from poundsterling website.

Graph Source: PoundSterling Live

The graph shows that the Japanse YEn has not been stable to US Dollar for last 10 years.It has always been fluctuating from very hig to very low.

B) Japanse yen has alawys been fluctuating from being highest in year in April 1995 to a value of 79 yen to 1 US Dollar and record low in JUly 1998 of 142 yen to 1 US Dollar. So the yen has never been stable. The reason for yen not being stable is that it has huge public debt. The country is hit by many natural disasters like earth quake and tsunami which altogether weakens the economy and hence lowering the currency value at international market.

C) Japan trade with all many countries. It has good manufacturing sector in automobiles hence a good number of cars are being exported to India, Euro countries, UK, China, Singapore etc.

D) The currency fluctate a lot of Japan, but doing business or investing in Japanse economy do invlove a risk. But with strong manufacturing sector it may turn out to wise decision in doing business.

E) The country is trying to make their currency stronger which will lead to growth og higher GDP.

Rahul Sunny answered 1 year ago

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