Effects of Typical Transactions - Assignment Example

2. MCI sells a new stock issue to Alcatel, the French telecommunications company. Payment in dollars is due immediately.
Answer: The current value of the dollar will rise as Alcatel demands dollars for the payment of the new stock issued. But when we look at the future value of the currency we see that the future value of the dollar will decline when the MCI will give dividend payment to Alcatel or other equipment and parts will be imported. However, the value of the dollar in the future could increase if expanded MCI output substitutes for telecom imports.

3. Korean Airline buys five Boeing 747s. As part of the deal, Boeing arranges a loan to KAL for the purchase amount from the U.S. Export-Import Bank. The loan is to be paid back over the next seven years with a two-year grace period.
Answer: Considering the above scenario the present value of the currency will have no effect but it considering the future value of the dollar will rise as KAL will repay the loan.

3. By the following circumstances, say whether the value of the dollar will appreciate, depreciate or remain the same relative to the Yen by explaining each answer. Suppose the exchange rates are free to vary and that other factors are held constant.
a. The growth rate of national income is higher in the United States than in Japan.
Answer: The value of the currency is directly proportional to the GNP means that when the GNP raises the value of the currency will also appreciate so the value of the dollar will rise.

b. Inflation is higher in the U.S. than in Japan.
Answer: Inflation is inversely proportionate to the value of the currency. The rate of inflation is high in the U.S. than in Japan the value of the dollar will fall in line with the purchasing power parity.
c. Prices in Japan and the United States are rising at the same rate.
Answer: According to the concept of purchasing power parity, the exchange rate between both countries will remain the same.
d. Real interest rates are higher in the United States than in Japan.
Answer: The value of the dollar will escalate as the rates of real interest are higher and which will attract capital from Japan that must first be converted into dollars.

e. The United States imposes new restrictions on the ability of foreigners to buy American companies and real estate.
Answer: In this situation, the United States will get less foreign investment in the country and which will cause the dollar price to fall as foreigners will find it less attractive to own U.S. assets.
f. U.S. wages rise relative to Japanese wages, and American productivity falls behind Japanese productivity. Read More