Assume that a UK family visits Spain every summer. Last year, the hotel room where they stayed was priced at £120 per night, and the price is the same this year. The exchange rate was 1.1 £/€ last year, and it is 0.98 £/€ this year. This means they will pay (£14.40 less/£14.40 more/£8.10 more/£8.10 less) per night this year than was paid last year. The pound/euro exchange rate is essentially the price of a euro in terms of pounds. When this price falls, the euro is said to depreciate against the pound. Thus, from your analysis, you can conclude that when the euro depreciates against the pound, European goods and services become (less/more) expensive for the British. DeutschAuto is a German automaker that pays for most of its production costs in euros. Assume that in 2015, DeutschAuto's cost of producing a car was €26,500, and the company sold the car in pounds for £42,000. Assume pound–euro exchange rate rose from 1 £/€ in 2015 to 1.57 £/€ in 2016. DeutschAuto's euro cost of production did not change, and the company continued to charge £42,000 for its cars in pounds, as DeutschAuto believes this is its profit-maximizing price. Examine how the rise in the pound–euro exchange rate affects DeutschAuto's profits from sales in pounds. (Hint: To simplify your analysis, ignore transportation costs.) In 2015, DeutschAuto's revenue from sales in pounds was (£26,500/£42,000/£26,752) per car. Given the cost of production, this means that DeutschAuto's profit was (£252/£15,500/£42,000) per car.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 9P

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Assume that a UK family visits Spain every summer. Last year, the hotel room where they stayed was priced at £120 per night, and the price is the same this year. The exchange rate was 1.1 £/€ last year, and it is 0.98 £/€ this year. This means they will pay (£14.40 less/£14.40 more/£8.10 more/£8.10 less) per night this year than was paid last year.

The pound/euro exchange rate is essentially the price of a euro in terms of pounds. When this price falls, the euro is said to depreciate against the pound. Thus, from your analysis, you can conclude that when the euro depreciates against the pound, European goods and services become (less/more) expensive for the British.

DeutschAuto is a German automaker that pays for most of its production costs in euros. Assume that in 2015, DeutschAuto's cost of producing a car was €26,500, and the company sold the car in pounds for £42,000. Assume pound–euro exchange rate rose from 1 £/€ in 2015 to 1.57 £/€ in 2016. DeutschAuto's euro cost of production did not change, and the company continued to charge £42,000 for its cars in pounds, as DeutschAuto believes this is its profit-maximizing price. Examine how the rise in the pound–euro exchange rate affects DeutschAuto's profits from sales in pounds. (Hint: To simplify your analysis, ignore transportation costs.)

In 2015, DeutschAuto's revenue from sales in pounds was (£26,500/£42,000/£26,752) per car. Given the cost of production, this means that DeutschAuto's profit was (£252/£15,500/£42,000) per car.

In 2016, DeutschAuto's revenue from sales in pounds was (£42,000/£26,752/£16,879/£65,940) per car. Given the cost of production, this means that DeutschAuto's profit was (£252/£15,500/£26,752/£39,440) per car.

The pound–euro exchange rate is essentially the price of one euro in terms of pounds. When this price rises, the euro is said to appreciate against the pound. Thus, from your analysis, you can conclude that when the euro appreciates against the pound, it becomes (easier/more difficult) for European companies to profit from exporting their products to pounds.

Assume that the Japanese government and private investors hold £150 billion in UK government bonds. When the Japanese yen–pound exchange rate is 95 ¥/£, these assets are worth (¥50 trillion/¥62.4 trillion/¥14.25 trillion) . If the pound appreciates to 102 ¥/£, the bonds held in Japan will be worth (¥50 trillion/¥62.4 trillion/¥15.3 trillion) .

The yen–pound exchange rate is essentially the price of one pound in terms of yen. When this price rises, the pound is said to appreciate against the yen. Thus, from your analysis, you can conclude that when the pound appreciates against the yen, holders of UK government bonds in Japan experience a(n) (¥6.8 trillion/¥1.05 trillion/¥8.4 trillion) (gain/loss) in their wealth.

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