國(guó)際財(cái)務(wù)管理(英文版)課后習(xí)題答案

CHAPTER1GLOBALIZATIONANDTHEMULTINATIONALFIRM

SUGGESTEDANSWERSTOENDOF-CHAPTERQUESTIONS

QUESTIONS

1.Whyisitimportanttostudyinternationalfinancialmanagement?

Answer:Wearenowlivinginaworldwhereallthemajoreconomicfunctions,i.e.,consumption,

production,andinvestment,arehighlyglobalized.Itisthusessentialforfinancialmanagerstofully

understandvitalinternationaldimensionsoffinancialmanagement.Thisglobalshiftisinmarked

contrasttoasituationthatexistedwhentheauthorsofthisbookwerelearningfinancesometwentyyears

ago.Atthattime,mostprofessorscustomarily(andsafely,tosomeextent)ignoredinternationalaspects

offinance.Thismodeofoperationhasbecomeuntenablesincethen.

2.Howisinternationalfinancialmanagementdifferentfromdomesticfinancialmanagement?

Answer:Therearethreemajordimensionsthatsetapartinternationalfinancefromdomesticfinance.

Theyare:

1.foreignexchangeandpoliticalrisks,

2.marketimperfections,and

3.expandedopportunityset.

3.Discussthethreemajortrendsthathaveprevailedininternationalbusinessduringthelasttwodecades.

Answer:The1980sbroughtarapidintegrationofinternationalcapitalandfinancialmarkets.Impetusfor

globalizedfinancialmarketsinitiallycamefromthegovernmentsofmajorcountriesthathadbegunto

deregulatetheirforeignexchangeandcapitalmarkets.Theeconomicintegrationandglobalizationthat

beganintheeightiesispickingupspeedinthe1990sviaprivatization.Privatizationistheprocessby

whichacountrydivestsitselfoftheownershipandoperationofabusinessventurebyturningitoverto

thefreemarketsystem.Lastly,tradeliberalizationandeconomicintegrationcontinuedtoproceedatboth

theregionalandgloballevels.

4.Howisacountry'seconomicwell-beingenhancedthroughfreeinternationaltradeingoodsand

services?

Answer:AccordingtoDavidRicardo,withfreeinternationaltrade,itismutuallybeneficialfortwo

countriestoeachspecializeintheproductionofthegoodsthatitcanproducerelativelymostefficiently

andthentradethosegoods.Bydoingso,thetwocountriescanincreasetheircombinedproduction,

whichallowsbothcountriestoconsumemoreofbothgoods.Thisargumentremainsvalidevenifa

countrycanproducebothgoodsmoreefficientlythantheothercountry.Internationaltradeisnotaczero-

sum,gameinwhichonecountrybenefitsattheexpenseofanothercountry.Rather,internationaltrade

couldbean'increasing-sum'gameatwhichallplayersbecomewinners.

5.Whatconsiderationsmightlimittheextenttowhichthetheoryofcomparativeadvantageisrealistic?

Answer:Thetheoryofcomparativeadvantagewasoriginallyadvancedbythenineteenthcentury

economistDavidRicardoasanexplanationforwhynationstradewithoneanother.Thetheoryclaims

thateconomicwell-beingisenhancedifeachcountry'scitizensproducewhattheyhaveacomparative

advantageinproducingrelativetothecitizensofothercountries,andthentradeproducts.Underlyingthe

theoryaretheassumptionsoffreetradebetweennationsandthatthefactorsofproduction(land,

buildings,labor,technology,andcapital)arerelativelyimmobile.Totheextentthattheseassumptionsdo

nothold,thetheoryofcomparativeadvantagewillnotrealisticallydescribeinternationaltrade.

6.Whataremultinationalcorporations(MNCs)andwhateconomicrolesdotheyplay?

Answer:Amultinationalcorporation(MNC)canbedefinedasabusinessfirmincorporatedinone

countrythathasproductionandsalesoperationsinseveralothercountries.Indeed,someMNCshave

operationsindozensofdifferentcountries.MNCsobtainfinancingfrommajormoneycentersaroundthe

worldinmanydifferentcurrenciestofinancetheiroperations.Globaloperationsforcethetreasurer's

officetoestablishinternationalbankingrelationships,toplaceshort-termfundsinseveralcurrency

denominations,andtoeffectivelymanageforeignexchangerisk.

7.Mr.RossPerot,aformerPresidentialcandidateoftheReformParty,whichisathirdpoliticalpartyin

theUnitedStates,hadstronglyobjectedtothecreationoftheNorthAmericanTradeAgreement

(NAFTA),whichnonethelesswasinauguratedin1994,forthefearoflosingAmericanjobstoMexico

whereitismuchcheapertohireworkers.WhatarethemeritsanddemeritsofMr.Perot'spositionon

NAFTA?ConsideringtherecenteconomicdevelopmentsinNorthAmerica,howwouldyouassessMr.

Perot9spositiononNAFTA?

Answer:SincetheinceptionofNAFTA,manyAmericancompaniesindeedhaveinvestedheavilyin

Mexico,sometimesrelocatingproductionfromtheUnitedStatestoMexico.Althoughthismighthave

temporarilycausedunemploymentofsomeAmericanworkers,theywereeventuallyrehiredbyother

industriesoftenforhigherwages.Currently,theunemploymentrateintheU.S.isquitelowbyhistorical

standard.Atthesametime,Mexicohasbeenexperiencingamajoreconomicboom.Itseemsclearthat

bothMexicoandtheU.S.havebenefitedfromNAFTA.Mr.Perot'sconcernappearstohavebeenill

founded.

8.In1995,aworkinggroupofFrenchchiefexecutiveofficerswassetupbytheConfederationofFrench

Industry(CNPF)andtheFrenchAssociationofPrivateCompanies(AFEP)tostudytheFrenchcorporate

governancestructure.Thegroupreportedthefollowing,amongotherthings“Theboardofdirectors

shouldnotsimplyaimatmaximizingsharevaluesasintheU.K.andtheU.S.Rather,itsgoalshouldbeto

servethecompany,whoseinterestsshouldbeclearlydistinguishedfromthoseofitsshareholders,

employees,creditors,suppliersandclientsbutstillequatedwiththeirgeneralcommoninterest,whichis

tosafeguardtheprosperityandcontinuityofthecompany”.Evaluatetheaboverecommendationofthe

workinggroup.

Answer:TherecommendationsoftheFrenchworkinggroupclearlyshowthatshareholderwealth

maximizationisnotauniversallyacceptedgoalofcorporatemanagement,especiallyoutsidetheUnited

StatesandpossiblyafewotherAnglo-SaxoncountriesincludingtheUnitedKingdomandCanada.To

someextent,thismayreflectthefactthatshareownershipisnotwidespreadinmostothercountries.In

France,about15%ofhouseholdsownshares.

9.Emphasizingtheimportanceofvoluntarycompliance,asopposedtoenforcement,intheaftermathof

corporatescandals,e.g.,EnronandWorldCom,U.S.PresidentGeorgeW.Bushstatedthatwhiletougher

lawsmighthelp,"ultimately,theethicsofAmericanbusinessdependsontheconscienceofAmerica's

businessleaders."Describeyourviewonthisstatement.

Answer:Therecanbedifferentanswerstothisquestion.Ifbusinessleadersalwaysbehavewithahigh

ethicalstandard,manyofthecorporatescandalswehaveseenlatelymightnothavehappened.Sincewe

cannotfullydependontheethicalbehavioronthepartofbusinessleaders,thesocietyshouldprotect

itselfbyadoptingtherules/regulationsandgovernancestructurethatwouldinducebusinessleadersto

behaveintheinterestofthesocietyatlarge.

10.SupposeyouareinterestedininvestinginsharesofNokiaCorporationofFinland,whichisaworld

leaderinwirelesscommunication.Butbeforeyoumakeinvestmentdecision,youwouldliketolearn

aboutthecompany.VisitthewebsiteofCNNFinancialnetwork()andcollect

informationaboutNokia,includingtherecentstockpricehistoryandanalysts,viewsofthecompany.

Discusswhatyoulearnaboutthecompany.Alsodiscusshowtheinstantaneousaccesstoinformationvia

internetwouldaffectthenatureandworkingsoffinancialmarkets.

Answer:Asstudentsmighthavelearnedfromvisitingthewebsite,informationisreadilyavailableeven

forforeigncompanieslikeNokia.Readyaccesstointernationalinformationhelpsintegratefinancial

markets,dismantlingbarrierstointernationalinvestmentandfinancing.Integration,however,mayhelpa

financialshockinonemarkettobetransmittedtoothermarkets.

MINICASE:NIKE'SDECISION

Nike,aU.S.-basedcompanywithagloballyrecognizedbrandname,manufacturesathleticshoesin

suchAsiandevelopingcountriesasChina,Indonesia,andVietnamusingsubcontractors,andsellsthe

productsintheU.S.andforeignmarkets.ThecompanyhasnoproductionfacilitiesintheUnitedStates.

IneachofthoseAsiancountrieswhereNikehasproductionfacilities,theratesofunemploymentand

underemploymentarequitehigh.ThewagerateisverylowinthosecountriesbytheU.S.standard;

hourlywagerateinthemanufacturingsectorislessthanonedollarineachofthosecountries,whichis

comparedwithabout$18intheU.S.Inaddition,workersinthosecountriesoftenareoperatinginpoor

andunhealthyenvironmentsandtheirrightsarenotwellprotected.Understandably,Asianhostcountries

areeagertoattractforeigninvestmentslikeNike'stodeveloptheireconomiesandraisetheliving

standardsoftheircitizens.Recently,however,Nikecameunderaworld-widecriticismforitspracticeof

hiringworkersforsuchalowpay,“nexttonothing”inthewordsofcritics,andcondoningpoorworking

conditionsinhostcountries.

Evaluateanddiscussvarious'ethical'aswellaseconomicramificationsofNike'sdecisionto

investinthoseAsiancountries.

SuggestedSolutiontoNike'sDecision

Obviously,Nike'sinvestmentsinsuchAsiancountriesasChina,Indonesia,andVietnamwere

motivatedtotakeadvantageoflowlaborcostsinthosecountries.WhileNikewascriticizedforthepoor

workingconditionsforitsworkers,thecompanyhasrecognizedtheproblemandhassubstantially

improvedtheworkingenvironmentsrecently.AlthoughNike'sworkersgetpaidverylowwagesbythe

Westernstandard,theyprobablyaremakingsubstantiallymorethantheirlocalcompatriotswhoareeither

under-orunemployed.WhileNike'sdetractorsmayhavevalidpoints,oneshouldnotignorethefactthat

thecompanyismakingcontributionstotheeconomicwelfareofthoseAsiancountriesbycreatingjob

opportunities.

CHAPTER1ATHEORYOFCOMPARATIVEADVANTAGE

SUGGESTEDSOLUTIONSTOAPPENDIXPROBLEMS

PROBLEMS

1.CountryCcanproducesevenpoundsoffoodorfouryardsoftextilesperunitofinput.Computethe

opportunitycostofproducingfoodinsteadoftextiles.Similarly,computetheopportunitycostof

producingtextilesinsteadoffood.

Solution:Theopportunitycostofproducingfoodinsteadoftextilesisoneyardoftextilesper7/4=1.75

poundsoffood.Apoundoffoodhasanopportunitycostof4/7=.57yardsoftextiles.

2.Considertheno-tradeinput/outputsituationpresentedinthefollowingtableforCountriesXandY.

Assumingthatfreetradeisallowed,developascenariothatwillbenefitthecitizensofbothcountries.

INPUT/OUTPUTWITHOUTTRADE

Country

XYTotal

I.UnitsofInput

(000,000)

Food7060

Textiles4030

II.OutputperUnitofInput

(lbsoryards)

Food175

Textiles52

III.TotalOutput

(lbsoryards)

(000,000)

Food1,1903001,490

Textiles20060260

IV.Consumption

(lbsoryards)

(000,000)

Food1,1903001,490

Textiles20060260

Solution:

Examinationoftheno-tradeinput/outputtableindicatesthatCountryXhasanabsolute

advantageintheproductionoffoodandtextiles.CountryXcan“tradeoff'oneunitofproduction

neededtoproduce17poundsoffoodforfiveyardsoftextiles.Thus,ayardoftextileshasanopportunity

costof17/5=3.40poundsoffood,orapoundoffoodhasanopportunitycostof5/17=.29yardsof

textiles.Analogously,CountryYhasanopportunitycostof5/2=2.50poundsoffoodperyardof

textiles,or2/5=.40yardsoftextilesperpoundoffood.Intermsofopportunitycost,itisclearthat

CountryXisrelativelymoreefficientinproducingfoodandCountryYisrelativelymoreefficientin

producingtextiles.Thus,CountryX(Y)hasacomparativeadvantageinproducingfood(textile)is

comparisontoCountryY(X).

Whentherearenorestrictionsorimpedimentstofreetradetheeconomic-wellbeingofthe

citizensofbothcountriesisenhancedthroughtrade.SupposethatCountryXshifts20,000,000units

fromtheproductionoftextilestotheproductionoffoodwhereithasacomparativeadvantageandthat

CountryYshifts60,000,000unitsfromtheproductionoffoodtotheproductionoftextileswhereithasa

comparativeadvantage.Totaloutputwillnowbe(90,000,000x17=)1,530,000,000poundsoffoodand

[(20,000,000x5=100,000,000)+(90,000,000x2=180,000,000)=]280,000,000yardsoftextiles.

FurthersupposethatCountryXandCountryYagreeonapriceof3.00poundsoffoodforoneyardof

textiles,andthatCountryXsellsCountryY330,000,000poundsoffoodfor110,000,000yardsoftextiles.

Underfreetrade,thefollowingtableshowsthatthecitizensofCountryX(Y)haveincreasedtheir

consumptionoffoodby10,000,000(30,000,000)poundsandtextilesby10,000,000(10,000,000)yards.

INPUT/OUTPUTWITHFREETRADE

Country

XYTotal

I.UnitsofInput

(000,000)

Food900

Textiles2090

ILOutputperUnitofInput

(lbsoryards)

Food175

Textiles52

III.TotalOutput

(lbsoryards)

(000,000)

Food1,53001,530

Textiles100180280

IV.Consumption

(lbsoryards)

(000,000)

Food1,2003301,530

Textiles21070280

CHAPTER3BALANCEOFPAYMENTS

SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER

QUESTIONSANDPROBLEMS

QUESTIONS

1.Definethebalanceofpayments.

Answer:Thebalanceofpayments(BOP)canbedefinedasthestatisticalrecordofacountry's

internationaltransactionsoveracertainperiodoftimepresentedintheformofdouble-entrybookkeeping.

2.Whywoulditbeusefultoexamineacountry'sbalanceofpaymentsdata?

Answer:Itwouldbeusefultoexamineacountry'sBOPforatleasttworeasons.First,BOPprovides

detailedinformationaboutthesupplyanddemandofthecountry'scurrency.Second,BOPdatacanbe

usedtoevaluatetheperformanceofthecountryininternationaleconomiccompetition.Forexample,ifa

countryisexperiencingperennialBOPdeficits,itmaysignalthatthecountry'sindustrieslack

competitiveness.

3.TheUnitedStateshasexperiencedcontinuouscurrentaccountdeficitssincetheearly1980s.Whatdo

youthinkarethemaincausesforthedeficits?WhatwouldbetheconsequencesofcontinuousU.S.

currentaccountdeficits?

Answer:ThecurrentaccountdeficitsofU.S.mayhavereflectedafewreasonssuchas(I)ahistorically

highrealinterestrateintheU.S.,whichisduetoballooningfederalbudgetdeficits,thatkeptthedollar

strong,and(ii)weakcompetitivenessoftheU.S.industries.

4.IncontrasttotheU.S.,Japanhasrealizedcontinuouscurrentaccountsurpluses.Whatcouldbethe

maincausesforthesesurpluses?Isitdesirabletohavecontinuouscurrentaccountsurpluses?

Answer:Japan'scontinuouscurrentaccountsurplusesmayhavereflectedaweakyenandhigh

competitivenessofJapaneseindustries.MassivecapitalexportsbyJapanpreventedyenfromappreciating

morethanitdid.Atthesametime,foreigners,exportstoJapanwerehamperedbyclosednatureof

Japanesemarkets.Continuouscurrentaccountsurplusesdisruptfreetradebypromotingprotectionist

sentimentinthedeficitcountry.Itisnotdesirableespeciallywhenitisbroughtaboutbythemercantilist

policies.

5.Commentonthefollowingstatement:"SincetheU.S.importsmorethanitexports,itisnecessaryfor

theU.S.toimportcapitalfromforeigncountriestofinanceitscurrentaccountdeficits.^^

Answer:ThestatementpresupposesthattheU.S.cutTentaccountdeficitcausesitscapitalaccount

surplus.Inreality,thecausalitymayberunningintheoppositedirection:U.S.capitalaccountsurplus

maycausethecountry'scurrentaccountdeficit.SupposeforeignersfindtheU.S.agreatplacetoinvest

andsendtheircapitaltotheU.S.,resultinginU.S.capitalaccountsurplus.Thiscapitalinflowwill

strengthenthedollar,hurtingtheU.S.exportandencouragingimportsfromforeigncountries,causing

currentaccountdeficits.

6.Explainhowacountrycanrunanoverallbalanceofpaymentsdeficitorsurplus.

Answer:AcountrycanrunanoverallBOPdeficitorsurplusbyengagingintheofficialreserve

transactions.Forexample,anoverallBOPdeficitcanbesupportedbydrawingdownthecentralbank's

reserveholdings.Likewise,anoverallBOPsurpluscanbeabsorbedbyaddingtothecentralbank's

reserveholdings.

7.Explainofficialreserveassetsanditsmajorcomponents.

Answer:Officialreserveassetsarethosefinancialassetsthatcanbeusedasinternationalmeansof

payments.Currently,officialreserveassetscomprise:(I)gold,(ii)foreignexchanges,(iii)special

drawingrights(SDRs),and(iv)reservepositionswiththeIMF.Foreignexchangesarebyfarthemost

importantofficialreserves.

8.Explainhowtocomputetheoverallbalanceanddiscussitssignificance.

Answer:TheoverallBOPisdeterminedbycomputingthecumulativebalanceofpaymentsincludingthe

currentaccount,capitalaccount,andthestatisticaldiscrepancies.TheoverallBOPissignificantbecause

itindicatesacountry'sinternationalpaymentgapthatmustbefinancedbythegovernment'sofficial

reservetransactions.

9.Sincetheearly1980s,foreignportfolioinvestorshavepurchasedasignificantportionofU.S.treasury

bondissues.Discusstheshort-termandlong-termeffectsofforeigners,portfolioinvestmentontheU.S.

balanceofpayments.

Answer:AsforeignerspurchaseU.S.Treasurybonds,U.S.BOPwillimproveintheshortrun.Butinthelong

run,U.S.BOPmaydeterioratebecausetheU.S.shouldpayinterestsandprincipalstoforeigners.Ifforeignfunds

areusedproductivelyandcontributestothecompetitivenessofU.S.industries,however,U.S.BOPmayimprove

inthelongrun.

10.Describethebalanceofpaymentsidentityanddiscussitsimplicationsunderthefixedandflexible

exchangerateregimes.

Answer:Thebalanceofpaymentsidentityholdsthatthecombinedbalanceonthecurrentandcapital

accountsshouldbeequalinsize,butoppositeinsign,tothechangeintheofficialreserves:BCA+BKA

=-BRA.Underthepureflexibleexchangerateregime,centralbanksdonotengageinofficialreserve

transactions.Thus,theoverallbalancemustbalance,i.e.,BCA=-BKA.Underthefixedexchangerate

regime,however,acountrycanhaveanoverallBOPsurplusordeficitasthecentralbankwill

accommodateitviaofficialreservetransactions.

11.Exhibit3.3indicatesthatin1991,theU.S.hadacurrentaccountdeficitandatthesametimeacapital

accountdeficit.Explainhowthiscanhappen?

Answer:In1991,theU.S.experiencedanoverallBOPdeficit,whichmusthavebeenaccommodatedby

theFederalReserve'sofficialreserveaction,i.e.,drawingdownitsreserveholdings.

12.Explainhoweachofthefollowingtransactionswillbeclassifiedandrecordedinthedebitandcredit

oftheU.S.balanceofpayments:

(1)AJapaneseinsurancecompanypurchasesU.S.Treasurybondsandpaysoutofitsbankaccountkept

inNewYorkCity.

(2)AU.S.citizenconsumesamealatarestaurantinParisandpayswithherAmericanExpresscard.

(3)AIndianimmigrantlivinginLosAngelessendsacheckdrawnonhisL.A.bankaccountasagiftto

hisparentslivinginBombay.

(4)AU.S.computerprogrammerishiredbyaBritishcompanyforconsultingandgetspaidfromtheU.S.

bankaccountmaintainedbytheBritishcompany.

Answer:

TransactionsCreditDebit

JapanesepurchaseofU.S.Tbondsq

JapanesepaymentusingNYCaccountq

U.S.citizenhavingamealinParis

PayingthemealwithAmericanExpressd

GifttoparentsinBombayd

Receiptsofthecheckbyparents(goodwill)d

Exportofprogrammingserviced

BritishpaymentoutitsaccountinU.S.d

13.ConstructthebalanceofpaymenttableforJapanfortheyearof1998whichiscomparableinformat

toExhibit3.1,andinterpretthenumericaldata.YoumayconsultInternationalFinancialStatistics

publishedbyIMForresearchforusefulwebsitesforthedatayourself.

Answer:

AsummaryoftheJapaneseBalanceofPaymentsfor1998(in$billion)

CreditsDebits

CurrentAccount

(1)Exports646.03

(1.1)Merchandise374.04

(1.2)Services62.41

(1.3)Factorincome209.58

(2)Imports-516.50

(2.1)Merchandise-251.66

(2.2)Services-111.83

(3.3)Factorincome-153.01

(3)Unilateraltransfer5.53-14.37

Balanceoncurrentaccount120.69

[(1)+(2)+(3)]

CapitalAccount

(4)Directinvestment3.27-24.62

(5)Portfolioinvestment73.70-113.73

(5.1)Equitysecurities16.11-14.00

(5.2)Debtsecurities57.59-99.73

(6)Otherinvestment39.51-109.35

Balanceonfinancialaccount-131.22

[(4)+⑸+(6)]

(7)Statisticaldiscrepancies4.36

Overallbalance-6.17

OfficialReserveAccount6.17

Source:IMF,InternationalFinancialStatisticsYearbook,1999.

Note:Capitalaccountintheabovetablecorrespondswiththe'Financialaccount'inIMF'sbalanceof

paymentstatistics.IMF'sCapitalaccount9isincludedin4Otherinvestment,intheabovetable.

MINICASE:MEXICO'SBALANCEOFPAYMENTSPROBLEM

Recently,Mexicoexperiencedlarge-scaletradedeficits,depletionofforeignreserveholdingsanda

majorcurrencydevaluationinDecember1994,followedbythedecisiontofreelyfloatthepeso.These

eventsalsobroughtaboutasevererecessionandhigherunemploymentinMexico.Sincethedevaluation,

however,thetradebalancehasimproved.

InvestigatetheMexicanexperiencesindetailandwriteareportonthesubject.Inthereport,you

may:

(a)documentthetrendinMexico'skeyeconomicindicators,suchasthebalanceofpayments,the

exchangerate,andforeignreserveholdings,duringtheperiod1994.1through1995.12,;

(b)investigatethecausesofMexico'sbalanceofpaymentsdifficultiespriortothepesodevaluation;

(c)discusswhatpolicyactionsmighthavepreventedormitigatedthebalanceofpaymentsproblemand

thesubsequentcollapseofthepeso;and

(d)derivelessonsfromtheMexicanexperiencethatmaybeusefulforotherdevelopingcountries.

Inyourreport,youmayidentifyandaddressanyotherrelevantissuesconcerningMexico'sbalanceof

paymentproblem.

SuggestedSolutiontoMexico'sBalance-of-PaymentsProblem

Tosolvethiscase,itisusefultoreviewChapter2,especiallythesectionontheMexicanpesocrisis.

DespitethefactthatMexicohadexperiencedcontinuoustradedeficitsuntilDecember1994,the

country'scurrencywasnotallowedtodepreciateforpoliticalreasons.TheMexicangovernmentdidnot

wantthepesodevaluationbeforethePresidentialelectionheldin1994.IftheMexicanpesohadbeen

allowedtograduallydepreciateagainstthemajorcurrencies,thepesocrisiscouldhavebeenprevented.

Thekeylessonsthatcanbederivedfromthepesocrisisare:First,Mexicodependedtoomuchon

short-termforeignportfoliocapital(whichiseasilyreversible)foritseconomicgrowth.Thecountry

perhapsshouldhavesavedmoredomesticallyanddependedmoreonlong-termforeigncapital.Thiscan

beavaluablelessonformanydevelopingcountries.Second,thelackofreliableeconomicinformation

wasanothercontributingfactortothepesocrisis.TheSalinasadministrationwasreluctanttofully

disclosethetruestateoftheMexicaneconomy.IfinvestorshadknownthatMexicowasexperiencing

serioustradedeficitsandrapiddepletionofforeignexchangereserves,thepesomighthavebeen

graduallydepreciating,ratherthansuddenlycollapsedasitdid.Thetransparentdisclosureofeconomic

datacanhelppreventthepeso-typecrisis.Third,itisimportanttosafeguardtheworldfinancialsystem

fromthepeso-typecrisis.Tothisend,amultinationalsafetynetneedstobeinplacetocontainthepeso-

typecrisisintheearlystage.

CHAPTER5THEMARKETFORFOREIGNEXCHANGE

SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER

QUESTIONSANDPROBLEMS

QUESTIONS

1.Giveafulldefinitionofthemarketforforeignexchange.

Answer:Broadlydefined,theforeignexchange(FX)marketencompassestheconversionofpurchasing

powerfromonecun,encyintoanother,bankdepositsofforeigncurrency,theextensionofcreditdenominated

inaforeigncurrency,foreigntradefinancing,andtradinginforeigncurrencyoptionsandfuturescontracts.

2.Whatisthedifferencebetweentheretailorclientmarketandthewholesaleorinterbankmarketfor

foreignexchange?

Answer:Themarketforforeignexchangecanbeviewedasatwo-t