Explain how the appreciation of the Japanese yen against the U.S. dollar would affect the return to a U. S. firm that borrowed Japanese yen and used the proceeds for a U.S. project.

3. Chapter 3 homework questions

The Exchange Rate Impact on Borrowing

An appreciation in the Japanese yen would result in a rise in borrowing costs for U.S. firms that borrow Japanese yen. They would need to spend more dollars in order to buy each yen. This would also mean they will have to pay higher interest rates when repaying the loan. This can lead to lower profits or losses in investments that are made using this money. They will also have to pay higher interest rates due to currency rate effects.

After the 1971 collapse of Bretton Woods, the Bretton Woods system that had previously fixed currency rates against gold in 1971 led to floating exchange rate. Many countries tried to liberalize their economy and make it easier to exchange with other countries. The result was 1973, which saw major currencies move to floating peer-to–peer exchange rate instead.

If the offer is from a tourist, it’s more lucrative to take their money. You are effectively earning $.77 per Peso ($200/1300 = $0.77) while you cash in at an airport foreign exchange counter will earn you $.60 per Canadian Dollar ($120/200 = $0.6). It would make more sense to accept the 1,300 pesos offer for C$200, and use the Pesos you have to purchase USD while on your trip to Mexico.

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