International Business
1. In general, several variables appear to affect the future value of a currency. Everything else being equal, with reference to the home country, clearly explain in a couple of sentences how each of the following variables are likely to appreciate or depreciate the country’s currency: (please think carefully before you answer these questions). (6 points)
a. Increase in GDP/output
b. Increase in money supply (M)
c. Increase in nominal interest rate (In)
d. Increase in real interest rate (Ir)
e. Increase in inflation
f. Increase in current account surplus
2. Please see attached article on investing in Africa and discuss the implications for multinational firms.
3. You are considering exchanging Swiss Francs (SF) for Japanese Yen (Y). At the bank, you see the following rates posted. SF/$ = 0.8750 Y/$ = 110.36
a. What is the Y/SF exchange rate?
b. What is the SF/Y exchange rate?
c. If the SF appreciated by 20% what would then new rate be?
d. If the Yen depreciated by 15% relative to the original exchange rate (i.e. answer to part a, or part b), what would the new rate be?
4. A decade ago, the Japanese yen stood at about 120 Yen/$; 10 years later, the Japanese yen is trading at about 110 Yen/$. Consider the case of the heavy earth-moving equipment industry, consisting of essentially two major players globally, US-based Caterpillar and Japan-based Komatsu.
a. What has happened to the Japanese Yen and how does it affect the relative competitive positions of Caterpillar and Komatsu? Explain your answer clearly and briefly.
b. How should this affect the strategic behavior of the two firms? You may wish to answer this question first from the short-term perspective, and then from the long-term perspective.
Sample Solution
International Business
Appreciation is directly linked to demand. If the value appreciates, demand for the currency also rises. In contrast, if a currency depreciates, it loses value against the currency against which it is being traded. The Gross Domestic Product (GDP) of a country is a representation of the dollar value of goods and services that have been produced within that country, generally over the span of one year. Changes in the GDP reveal changes in economic growth and can directly impact the relative value of a country`s currency. A high GDP reflects larger production rates, an indication of greater demand for that country`s products. An increase in demand for a country`s goods and services often translates into increased demand for the country`s currency.
