MAN 3600 Exam 3 Review Questions
and Correct Answers.
Currencies and Exchange Rates - Answer more than 150 currencies in use world wide
*Convertible vs. non-convertible* currencies
*Hard currencies* - most convertible currencies and universally accepted
e.g. U.S. dollar, Japanese yen, Canadian dollar, British pound, and the European Euro
*Exchange rate*: price of one currency in terms of another
- exchange rates affect the fortunes of the firm in various ways -- costs of inputs, sales
performance, which market entry strategies to use, etc.
-- based on supply and demand of currencies
Exchange Rates - Answer *constantly fluctuating*
the prices the firm charges can be quoted in the firm's currency or in the currency of each
foreign customer
because several months can pass between placement and delivery of an order resulting in
uncertainty ...
the firm and its customers can use the exchange rate as it stands on the date of each
transaction, or they can agree to use a specific exchange rate
Foreign Exchange Markets - Answer *foreign exchange*: all forms of internationally-traded
monies including foreign currencies, bank deposits, checks, and electronic transfers
*foreign exchange market*: the global marketplace for buying and selling national currencies
The Big Mac Index (burger) - Answer tells us how valuable the local currency is
,Finland 5.6
Canada 5.3
United States 5.3
Italy 5.1
Taiwan 2.3
Russia 2.3
Egypt 1.9
Ukraine 1.6
- converting US dollar into their currency
-- can calculate currency valuations out of this
*currency valuation = (P local - P U.S.) / P U.S.*
[P stands for price]
EX: Swiss currency valuation = (6.8 - 5.3) / 5.3 = .283 (+28.3%) --> the local currency is
overvalued; paying more in Switzerland
EX: Ukraine currency valuation = (1.6 local price - 5.3 U.S. price) / 5.3 = -.698 (-69.8%) --> the
local currency is undervalued; paying much less in Ukraine
What if there is no price in US dollars?
--> only in local currency ... (i.e. US price not given and only shows price in the currency of that
country) -- you can still calculate by converting local price into US dollar using the exchange rate
The Purpose of Exchange Rates - Answer *the purpose of exchange rates is to facilitate
international purchases*
*Purchasing Power Parity (PPP)* - what a currency is worth
-- in theory, an exchange rate will equalize the price of an identical product or service in two
different currencies
*Law of One Price*
- "the exchange rate based on just one good or service"
, How Exchange Rates Are Determined - Answer In a free market, the "price" of any currency
(the exchange rate) is determined by supply and demand:
- the greater the supply of a currency, the lower its price
- the lower the supply of a currency, the higher its price
- the greater the demand for a currency, the higher its price
- the lower the demand for a currency, the lower its price
Factors Influencing Supply and Demand of Currency - Answer factors that influence the supply
and demand for currency:
- economic growth
- interest rates and inflation
- market psychology
- government action
- trade balance (e.g. deficit or surplus)
Factors that Influence the Supply and Demand for a Currency - Answer *economic growth* is
the increase in value of the goods and services produced by an economy
*- measured as the annual increase in real GDP* (in which the inflation rate is subtracted from
growth)
- driven by entrepreneurship and innovation
- the nation's *central bank* regulates the money supply, issues currency and manages the
exchange rate, to accommodate economic growth
*Ethiopia has the world's fastest economic growth rate* -- according to annual GDP growth
(their economy is mostly agriculture-based)
*market psychology* refers to investor behavior, such as herding behavior or momentum
trading
*inflation* refers to increases in price of goods and services; thus, money buys less than before
~ some countries (e.g. Argentina, Israel, Russia) have experienced hyperinflation
~ high inflation erodes a currency's purchasing power
and Correct Answers.
Currencies and Exchange Rates - Answer more than 150 currencies in use world wide
*Convertible vs. non-convertible* currencies
*Hard currencies* - most convertible currencies and universally accepted
e.g. U.S. dollar, Japanese yen, Canadian dollar, British pound, and the European Euro
*Exchange rate*: price of one currency in terms of another
- exchange rates affect the fortunes of the firm in various ways -- costs of inputs, sales
performance, which market entry strategies to use, etc.
-- based on supply and demand of currencies
Exchange Rates - Answer *constantly fluctuating*
the prices the firm charges can be quoted in the firm's currency or in the currency of each
foreign customer
because several months can pass between placement and delivery of an order resulting in
uncertainty ...
the firm and its customers can use the exchange rate as it stands on the date of each
transaction, or they can agree to use a specific exchange rate
Foreign Exchange Markets - Answer *foreign exchange*: all forms of internationally-traded
monies including foreign currencies, bank deposits, checks, and electronic transfers
*foreign exchange market*: the global marketplace for buying and selling national currencies
The Big Mac Index (burger) - Answer tells us how valuable the local currency is
,Finland 5.6
Canada 5.3
United States 5.3
Italy 5.1
Taiwan 2.3
Russia 2.3
Egypt 1.9
Ukraine 1.6
- converting US dollar into their currency
-- can calculate currency valuations out of this
*currency valuation = (P local - P U.S.) / P U.S.*
[P stands for price]
EX: Swiss currency valuation = (6.8 - 5.3) / 5.3 = .283 (+28.3%) --> the local currency is
overvalued; paying more in Switzerland
EX: Ukraine currency valuation = (1.6 local price - 5.3 U.S. price) / 5.3 = -.698 (-69.8%) --> the
local currency is undervalued; paying much less in Ukraine
What if there is no price in US dollars?
--> only in local currency ... (i.e. US price not given and only shows price in the currency of that
country) -- you can still calculate by converting local price into US dollar using the exchange rate
The Purpose of Exchange Rates - Answer *the purpose of exchange rates is to facilitate
international purchases*
*Purchasing Power Parity (PPP)* - what a currency is worth
-- in theory, an exchange rate will equalize the price of an identical product or service in two
different currencies
*Law of One Price*
- "the exchange rate based on just one good or service"
, How Exchange Rates Are Determined - Answer In a free market, the "price" of any currency
(the exchange rate) is determined by supply and demand:
- the greater the supply of a currency, the lower its price
- the lower the supply of a currency, the higher its price
- the greater the demand for a currency, the higher its price
- the lower the demand for a currency, the lower its price
Factors Influencing Supply and Demand of Currency - Answer factors that influence the supply
and demand for currency:
- economic growth
- interest rates and inflation
- market psychology
- government action
- trade balance (e.g. deficit or surplus)
Factors that Influence the Supply and Demand for a Currency - Answer *economic growth* is
the increase in value of the goods and services produced by an economy
*- measured as the annual increase in real GDP* (in which the inflation rate is subtracted from
growth)
- driven by entrepreneurship and innovation
- the nation's *central bank* regulates the money supply, issues currency and manages the
exchange rate, to accommodate economic growth
*Ethiopia has the world's fastest economic growth rate* -- according to annual GDP growth
(their economy is mostly agriculture-based)
*market psychology* refers to investor behavior, such as herding behavior or momentum
trading
*inflation* refers to increases in price of goods and services; thus, money buys less than before
~ some countries (e.g. Argentina, Israel, Russia) have experienced hyperinflation
~ high inflation erodes a currency's purchasing power
