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Answers to supplementary objective test questions

CHAPTER 6 – THE FINANCIAL CONTEXT OF BUSINESS II:
INTERNATIONAL ASPECTS

6.1 B

At £1 = $2 dollar price was $200,000, if dollar price has risen by 10% it is now
$220,000.

At an exchange rate of £1 = $1.50 sterling price is now 220,000/1.5 = £146,666

6.2 D

The main advantage of a system of flexible or floating exchange rates is that it
provides automatic correction of balance of payments.

6.3 B

In the short term the exchange rate will rise as money is attracted to higher
deposit rates but, in the long term, it would fall as higher interest rates will
undermine the competitiveness of US firms.

6.4 A

Transaction risk relates to an individual transaction. Translation risk refers to
the value of foreign currency denominated assets and liabilities in the financial
statements changing with the exchange rate when the statements are prepared.
Economic risk affects importers/exporters who have many transactions affected
by changes in the rate of exchange, thus affecting their business value.

6.5 B

All statements are correct except for B. Futures contracts are standardised to
certain values and can only be bought or sold in full. This means that often the
use of futures contracts means that the exact currency exposure isn’t covered.

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