Question

Which statement below is correct when the exchange rate increases for U.S. dollars per one Euro?

		The indirect exchange rate for Euros has increased.
		A company that has a receivable denominated in Euros experienced a loss.
		The U.S. dollar has experienced a weakening relative to the Euro.
		Imports from Europe to the U.S. are less expensive.

Answer 1

Answer : The U.S. dollar has experienced a weakening relative to the Euro.

Explanation : If the direct exchange rate for Euros (U.S dollars per one Euro) has increased, indirect exchange rate for Euros ( Euros per one U.S. dollar ) has decreased.

A company that has receivable in Foreign currency (FC) is afraid of FC falling against HC (Home currency). Here, the company has receivable denominated in Euros so the company is afraid of Euro falling against U.S. dollars. But the direct exchange rate for Euros has increased and therefore the company will experienced a profit.

Direct exchange rate for Euros has increased. It implies that Euro has strengthened relative to the U.S. dollar and U.S dollar has declined relative to the Euro.

U.S. will have Euros payable if it imports from Europe and will be afraid of Euro rising against U.S dollar (increase in direct exchange rate for Euro). Therefore, increase in direct exchange rate for Euro will make the imports from Europe to U.S. more expensive.