Question

A stronger yen:

		is welcomed by all.
		allows Japanese firms to go on spending sprees.
		makes Japanese exports more competitive.
		makes Japanese exports more competitive and allows Japanese firms to go on spending sprees.

Company ABC imports cheese from America to make cheesecake in Korea. If the Korean won (KRW) appreciates against USD, what will most likely happen?

		Variable costs will increase.
		Variable costs will decrease.
		Variable costs will not change.
		Fixed costs will decrease.

A U.S. MNC will receive 1 million Indian rupees (INR) in one year. The current spot rate is INR75 /USD and the one year forward rate is INR320/USD. The annual interest rate is 5 percent in India and 0 percent in the United States. The dollar amount the firm will receive using the forward hedge is

		USD 75,000,000.
		USD 13,333.
		USD 3,125.
		None of the answers is correct.

Answer 1

1]

A stronger yen means that each yen can buy a higher quantity of foreign currency. Conversely, each unit of foreign currency will buy a lower quantity of yen.

A stronger yen does not make Japanese exports more competitive because each unit of foreign currency will buy a lower quantity of yen. That is, Japanese goods become more expensive in foreign currency terms. Therfore, options 3 and 4 are incorrect.

Option 1 is incorrect. A stronger yen is not welcomed by Japanese exporters.

Option 2 is correct. A stronger yen allows Japanese firms to go on spending sprees because each yen can buy a higher quantity of foreign currency, making investing abroad cheaper for Japanese firms

2]

If the KRW appreciates against USD, each KRW can buy a higher quantity of USD. Conversely, each USD will buy a lower quantity of KRW.

Buying cheese is a variable cost for a cheesecake manufacturer because it changes proportionately to the amount of cheesecake produced.

Variable costs will decrease because it costs less in KRW to buy the cheese from America.

3]

The dollar amount the firm will receive using the forward hedge = amount receivable in INR / forward rate

The dollar amount the firm will receive using the forward hedge = INR 1,000,000 / 320

The dollar amount the firm will receive using the forward hedge = $3,125