Indicate whether each of the following desired transactions would increase the demand for or the supply...

Indicate whether each of the following desired transactions would increase the demand for or the supply of foreign currency units (FCU) in the FX market and whether it would constitute upward (UP) or downward (DOWN) pressure on the price of the FCU (in USD terms) [Hint: The U.S. is the home country and demand and supply of FCU are relative to the USD]

Desired Transaction	Increased Demand or Supply of FCU	Pressure on Price of FCU (USD/FCU)
UK firm, using GBP, imports software from US	Supply	DOWN
French wine maker, using EUR, buys wine making equipment from US
Mexican investors sell US stocks and repatriate proceeds to Mexico (in MXN)
Mexican investors sell US stocks and repatriate proceeds to Mexico (in MXN)
Boeing, using USD, buys engines from Rolls Royce, which as a UK firm requires GBP
Swedish insurance company, using SEK, buys US Treasury bonds
US shareholders of German firm receive dividend (in EUR) that they repatriate (in USD)

Expert Solution

Working notes (increased demand for FCU increases its price and increased supply of FCU decreases its price):

(1) Transaction 1

UK firm has to sell GBP and buy dollars to pay for US imports. Supply of GBP rises.

(2) Transaction 2

French wine maker has to sell Euro and buy dollars to pay for US imports. Supply of Euro rises.

(3) Transaction 3 and 4

Mexican investors sell dollars to buy MXN for repatriation. Demand for MXN rises.

(4) Transaction 5

Rolls Royce requires GBP. It sells dollars to buy GBP. Demand for GBP rises.

(5) Transaction 6

Swedish company sells SEK to buy dollsr for investing in US. Supply of SEK rises.

(6) Transaction 7

US investors receive dividend income in Euro. Supply of Euro rises.

Desired Transaction	Increased Demand or Supply of FCU	Pressure on Price of FCU (USD/FCU)
UK firm, using GBP, imports software from US	Increased Supply	DOWN
French wine maker, using EUR, buys wine making equipment from US	Increased Supply	DOWN
Mexican investors sell US stocks and repatriate proceeds to Mexico (in MXN)	Increased Demand	UP
Mexican investors sell US stocks and repatriate proceeds to Mexico (in MXN)	Increased Demand	UP
Boeing, using USD, buys engines from Rolls Royce, which as a UK firm requires GBP	Increased Demand	UP
Swedish insurance company, using SEK, buys US Treasury bonds	Increased Supply	DOWN
US shareholders of German firm receive dividend (in EUR) that they repatriate (in USD)	Increased Supply	DOWN

Rahul Sunny answered 1 year ago

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Indicate whether each of the following desired transactions would increase the demand for or the supply...

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