If Euro value fell to 0.98 vs USD, which company would be more competitive in Europe? Why?

  • North is a US company based in Denver, with subsidiaries in Turkey and India. North is expected to generate US$5 mn from its US operations each year in the next 5 years, TL5 mn from its Turkey operations each year in the next 5 years and TL INR10 mn from India operations in the next 5 years.

Calculate the cashflow of North in the next 5 years.

Note that USDTL is TL7 in the first year and TL is expected to depreciate by 10% each year in the next 5 years.

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Meanwhile INRUSD is expected stay flat at 0.014 for the next 5 years.

  • Guney is a company based in Europe and is considering investment opportunities in US and Turkey that could effect the value of the company.

Please analyze each investment below to see if it would create any exchange rate uncertainty on Guney’s expected cashflows and how?

1- A licensing deal to sell technology to a US company for US$5 mn, the payment is invoiced in dollars.

2- Acquisition of a large firm in Turkey

3- Start importing the major raw material from Turkey in TL at a lower cost instead of a company in Europe.

4- Export to US in USD

  • Assume TL depreciated by 10%. Explain how this would impact Turkey’s CA deficit?

 

  • Dunya A.S. based in Turkey, makes hand bags and sells them in the US and Europe and competes with European Laurent and US Joan in both markets. Dunya prices a hangbag at TL400, Laurent at Eur60 and Joan at US$60.

 

1 USD= 6TL

1 Euro= 7TL

  • Which company is more competitive in the US? Why?
  • 2- If Euro value fell to 0.98 vs USD, which company would be more competitive in Europe? Why?

 

  • Multiplle choices:
  1. ____ are not a factor that causes currency supply and demand schedules to change.
a. relative inflation rates
b. relative interest rates
c. relative income levels
d. expectations
e. All of these are factors that cause currency supply and demand schedules to change. 

 

  1. Assume that Canada places a strict quota on goods imported from the United States and that the United States does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____.​
a. ​increase; increase
b. ​increase; decline
c. ​decline; decline
d. ​decline; increase
iii- The value of the euro was $1.30 last week. During last week the euro depreciated by 5 percent. What is the value of the euro today? 

 

$1.365

$1.235

$1.330

$1.30

 

  1. Assume that income levels in the United Kingdom start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of the British pound. Also, assume that U.S. interest rates rise, while British interest rates remain unchanged and that no inflation is expected in either country. This will place ____ pressure on the value of the British pound.

Downward; downward

Upward; downward

Upward; upward

Downward; upward

 

  1. If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the United States and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____.​

Yen; dollars

  1. B) yen;yen

Dollars; yen

Dollars; dollars

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