Chapter 13, Problem 3QAP

Erie Co. has most of its business in the United States, except that it exports to Belgium. Its exports were invoiced in euros (Belgium’s currency) last year. It has no other economic exposure to exchange rate risk. Its main competition when selling to Belgium’s customers is a company in Belgium that sells similar products, denominated in euros. Starting today, Erie Co. plans to adjust its pricing strategy to invoice its exports in U.S. dollars instead of euros. Based on the new strategy, will Erie Co. be subject to economic exposure to exchange rate risk in the future? Briefly explain.

Since the U.S. company is a buyer, should not it focus on either a Forward contract or a "Call Option"? This case is about "Foreign Currency Liability," which is "Payable." Put Option is used when the company exercises selling options, but the case about includes that the company "regularly purchases."  Can you please explain thoroughly? unless i have messed anything to grasp.

Your company located in the US imports raw materials from Europe. If the European Central Bank announces to lower the Euro exchange rate, what impact do you expect to see in your business?   A. Your company will pay higher US dollar costs to import from Europe.     B. Your company will pay lower US dollar costs to import from Europe.   C. The Euro exchange rate doesn't have any impact on your company.   D. It should reduce your competitiveness in your home market.

Palmetto Bug Extermination Corporation (PBEC), a U.S. company, regularly purchases chemicals from a supplier in Switzerland with the invoice price denominated in Swiss francs. PBEC has experienced several foreign exchange losses in the past year due to increases in the U.S. dollar price of the Swiss currency. As a result, Dewey Nukem, PBEC's CEO, has asked you to investigate the possibility of using derivative financial instruments, specifically foreign currency forward contracts and foreign currency options, to hedge the company's exposure to foreign exchange risk. Required Draft a memo to CEO Nukem comparing the advantages and disadvantages of using forward contracts and options to hedge foreign exchange risk. Recommend the type of hedging instrument you believe the company should employ and justify this recommendation.

If a U.S.-based company regularly purchases goods from foreign suppliers in Japan with the invoice price denominated in Japanese Yen. And if the U.S. company has experienced several foreign exchange losses due to the depreciation of the Japanese Yen. Which type of hedging instrument (Foreign currency forward contract or foreign currency option) the company should employ? Please provide a justification for the selection. Also, compare the advantages and disadvantages of using (Forward contracts) and (Options) to hedge foreign exchange risk.

Which of the following condition that is likely to force the U.S. firms to establish a subsidiary in the foreign country even if production costs are higher in a foreign country. A. The host government of that country increases all quotas. B. The host government of that country eliminates all quotas. C. The host government of that country eliminates all tariffs. D. The host government of that country reduces all quotas.

The theory of purchasing power parity (PPP) states that in the long-run exchange rates between two countries adjusts so that the price of an identical good is the same when expressed in the same currency. A scanner sells for $65.45 in the United States. The exchange rate between the U.S. dollar and the Swiss franc (SFr) is $0.8245 per Swiss franc.   Suppose the price of the scanner in Switzerland was actually SFr 63.50. Assuming no transaction costs, transportation costs, or import restrictions, PPP predicts that the demand would (decrease or Increase) in Switzerland.

Yoyo Ltd is a UK company which is selling some goods to Marcos Co, an Australan conpany. The parties have agreed that a letter of credit should be used in relation to this contractWith regard to the role of the parties and their banks, which of the following staternents is accurate?A. The importer and the issuing bank are in the UK, the exporter and the advising bank are in AustraliaB. The exporter and the issuing bank are in the UK, the importer and the advising bank are in AustraliaC. The exporter and the advising bank are in the UK, the importer and the issuing bank are in AustraliaD. The importer and the advising bank are in the UK, the exporter and the issuing bank are in Australia

A U.S. company purchases inventory from a foreign vendor, and purchases are denominated in the foreign currency (FC). The U.S. dollar is expected to weaken against the FC. Explain how a forward contract might be employed as a hedge against exchange rate risk.