Question

1) Recently the British Pound suffered an unexpected depreciation in value. Which of the following actions being considered by Coventry Furniture of London, a purely domestic furniture manufacturer and retailer, would be considered a highly unlikely response to the depreciation of the pound?

A) Coventry might choose to maintain its domestic sales prices constant in pound terms.

B) Coventry might try to raise domestic prices because competing imports are now priced higher in England.

C) Coventry might try to lower domestic prices because competing imports are now priced higher in England.

D) none of the above

2) For a firm that competes internationally to sell its products, a depreciation of its domestic currency relative to markets where the firm exports goods, should eventually result in ________ sales at home and ________ sales abroad, other things equal.

A) fewer; greater

B) fewer; fewer

C) greater; greater

D) greater; fewer

3) Which one of the following management techniques is likely to best offset the risk of long-run exposure to receivables denominated in a particular foreign currency?

A) Borrow money in the foreign currency in question.

B) Lend money in the foreign currency in question.

C) Increase sales to that country.

D) Increase sales in this country.

4) A British firm and a U.S. Corporation each wish to enter into a currency swap hedging agreement. The British firm is receiving U.S. dollars from sales in the U.S. but wants pounds. The U.S. firm is receiving pounds from sales in Britain but wants dollars. Which of the following choices would best satisfy the desires of the firms?

A) The British firm pays dollars to a swap dealer and receives pounds from the dealer. The U.S. firm pays pounds to the swap dealer and receives dollars.

B) The U.S. firm pays dollars to a swap dealer and receives pounds from the dealer. The British firm pays pounds to the swap dealer and receives dollars.

C) The British firm pays pounds to a swap dealer and receives pounds from the dealer. The U.S. firm pays dollars to the swap dealer and receives dollars.

D) The British firm pays dollars to a swap dealer and receives dollars from the dealer. The U.S. firm pays pounds to the swap dealer and receives pounds.

Answer 1

1 (B) Imported furniture will now be more expensive as importers have to pay more Pounds for the same furniture because the Pound has depreciated. However, it is highly unlikely that Coventry will raise its prices beacuse higher prices will mean lower demand for Coventry.

Conventry should keep its prices stable.

2 (A) Depreciation in domestic currency will lead to price rise in the domestic market and hence will reduce the demand and sales

However, depreciated domestic currency will mean that foreign country will now have to pay less for the same amount of goods imported from domestic country. Hence foreign country market will demand more of the product thereby increasing the sales.

3 (A) Borrow the money in foreign currency

To create an offset we have to maintain two trades which are opposite to each other. Receivables is a long position in the foreign currency and borrowing a loan is a shot position in the foreign currency.

Long-run risk can come from changes in interest rate which can be off-set by the above technique.

4 (A) Both firms will eventually have to convert their sales revenue into the domestive currency of their respective countries. Hence "A" is the only option that would satisfy the desires of both firms.