1. Suppose that one euro costs 90 cents on January 1. Suppose that on March 1, o

Question

1. Suppose that one euro costs 90 cents on January 1. Suppose that on March 1, one euro costs 85 cents. Circle the correct answers and fill in the blanks: a. The euro has appreciated/ depreciated b. The dollar has appreciated/ depreciated. c. The exchange rate of dollar per euro on January 1st is equal to d. The exchange rate of euro per dollar on March 1st is equal to e. Suppose that one dollar cost 8 Yuan on March 1st, the exchange rate of Euro per Yuan on March 1st is equal to Given the information in question 1, assume you work for a firm in the United States and are thinking about purchasing products from a European firm. Assume the total value of those products is 400,000 euros. 2. a. How much would you spend if you purchase the products in January? b. How much would you spend if you wait until March? Suppose that you knew in January that you wanted to buy the products, but that you wouldn't actually make the expenditure until March. What action could you take in January to eliminate your purchasing risk? c.

Explanation / Answer

1. a) Euro depreciates because it is now able to purchase less cents of dollar.

b) Dollar appreciates

c) Exchange rate = Dollar/Euro = $ 0.9/1 = 0.9

d) Exchange rate = 85cents/euro = 0.85/1 = 0.85

e) Exchange rate of Euro per Yuan = 1 euro per 8 Yuan = 1/8 = 0.125

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