Log in
Finance
1
answer
0
watching
103
views

As a finance officer at your company, you have been asked to conduct an analysis of the possible impact on your corporation of the new currency, the euro, which started circulating on January 1, 2002, in 12 of the 15 European Union member countries. International sales are important to the company and are expected to increase continuously in the future. The prospects for substantial growth from international sales will depend on the correct management of European markets and finances. (Although the euro started circulating on January 1, 2002, it was launched on January 1, 1999 and so euro-denominated bonds and equity already existed on January 1, 2002 and are increasing.)

Watch
1
answer
0
watching
103
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Patrina Schowalter
Patrina SchowalterLv2
29 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

As a finance officer at your company, you have been asked to conduct an analysis of the possible impact on your corporation of the new currency, the euro, which started circulating on January 1, 2002, in 12 of the 15 European Union member countries. International sales are important to the company and are expected to increase continuously in the future. The prospects for substantial growth from international sales will depend on the correct management of European markets and finances. (Although the euro started circulating on January 1, 2002, it was launched on January 1, 1999 and so euro-denominated bonds and equity already existed on January 1, 2002 and are increasing.)

1. In the long run, will the creation of the euro boost your company's international business volume?

2. Your company plans to issue euro-denominated bonds. Will it matter whether you hire a Dutch bank or an Italian bank? Why or why not?

3. Use the dollar and interest rate figures in your text to explain the need to distinguish between real and nominal interest rates when predicting exchange rate movements.

4. Assume that today is January 1, U.S. $1.00 = .90 euros, and the interest rate on dollar deposits is 3%. If in one year:

a. the dollar appreciates relative to the euro by 10%, what will be the return on dollar deposits in terms of euros?

b. the dollar depreciates relative to the euro by 20%, what will be the return on dollar deposits in terms of euros?

c. the expected exchange rate is U.S. $1.00 = .95 euros, what is the expected rate of depreciation for the dollar?

d. the dollar is expected to appreciate 5%, what interest rate on euro deposits is required if the concepts of interest-rate parity and capital mobility are to hold?

As a finance officer at your company, you have been asked to conduct an analysis of the possible impact on your corporation of the new currency, the euro, which started circulating on January 1, 2002, in 12 of the 15 European Union member countries. International sales are important to the company and are expected to increase continuously in the future. The prospects for substantial growth from international sales will depend on the correct management of European markets and finances. (Although the euro started circulating on January 1, 2002, it was launched on January 1, 1999 and so euro-denominated bonds and equity already existed on January 1, 2002 and are increasing.)

1. Explain how an increase in the interest rate in Europe would affect the interest rate in the United States and the dollar-euro exchange rate under the theory of Interest Parity Condition. What factors does this theory leave out?

2. State the possible impact of the euro on the following:

a. The interest rates in various Euro-zone countries

b. The interest rate in the United States

c. The size of capital markets in Europe

d. The average size of banks in Europe

e. The number of banks in Europe

f. Foreign exchange revenues for banks

g. The strength of the dollar

h. Fiscal policy flexibility for euro-zone countries

i. Monetary policy flexibility for euro members

3. Explain why foreign exchange rates are important to your company. How would changes in the exchange rate between the euro and the dollar affect the sales and net profits of your company?

4. In the long run, will the creation of the euro boost your company's international business volume?

5. Your company plans to issue euro-denominated bonds. Will it matter whether you hire a Dutch bank or an Italian bank? Why or why not?

6. Use the dollar and interest rate figures in your text to explain the need to distinguish between real and nominal interest rates when predicting exchange rate movements.

7. Assume that today is January 1, U.S. $1.00 = .90 euros, and the interest rate on dollar deposits is 3%. If in one year:

a. the dollar appreciates relative to the euro by 10%, what will be the return on dollar deposits in terms of euros?

b. the dollar depreciates relative to the euro by 20%, what will be the return on dollar deposits in terms of euros?

c. the expected exchange rate is U.S. $1.00 = .95 euros, what is the expected rate of depreciation for the dollar?

d. the dollar is expected to appreciate 5%, what interest rate on euro deposits is required if the concepts of interest-rate parity and capital mobility are to hold?

Debt Crisis
With the creation of the European Monetary System and the birth of the euro in 1999, the U.S dollar is facing challenges to its position as the key reserve currency in international financial transactions. However, for the euro to keep its international position as a reserve currency, the European Union must function as a cohesive political entity that can exert its influence on the world stage. There are numerous challenges facing euro-zone countries now, with debt crisis in several countries.
The euro, common currency among seventeen euro-zone countries is facing numerous challenges. Germany's finance minister said “his country is prepared to pursue bold action to preserve Europe's common currency, including deeper economic integration with its neighbors, and issued a warning to markets not to underestimate Berlin's resolve to protect the euro (Wall Street Journal, Dec. 11, 2010). Germany could accept steps toward fiscal union if current attempts to improve the euro zone's governance proved insufficient to end the year-old debt crisis. All European countries are determined to keep this European currency stable, so Europe will find steps toward further unification.
Many Germans, including leading members of the government, oppose further economic integration within the 17-nation euro zone over fears that Germany would be forced to pay the debt of others. Proponents of such steps warn that not only the euro but the EU itself could fall apart if governments fail to act. So far, Germany, the euro zone's economic motor, has vociferously opposed such proposals, sparking accusations from some of its neighbors that Berlin isn't acting in Europe's best interest. This is addressing fears that the debt crisis could spread from small countries such as Greece, Ireland, and Portugal to major economies such as Spain and Italy. It is argued that there will be no domino effect, as long as big economies like Germany defend the common currency.
Europe should concentrate on explaining to markets the decisions it has made so far, including the move to set up a European Stability Mechanism in 2013 that could impose losses on bond investors if euro members run up excessive debts.
Under the present structure, with unified monetary policy but not fiscal policy, different interest rates [on government bonds] are the mechanism that makes member states adhere to solid public finances. There is a need to improve the existing structure, and if this structure doesn't work, then they must indeed talk about alternatives.

1. Will increasing the size of the bailout fund (from which troubled countries can draw in times of crisis) help to prevent future crises? Why or why not? What is the downside of increasing this fund?

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in