DAY 22
Section B
Mission CMA Part 2
Question: 1
Answer (A) is correct.
A sight draft, also known as a demand draft, is a draft ordering payment on sight, i.e., when
presented for payment. It is sent to the importer’s bank with the shipping documents. After
the draft is signed by the importer, the bank charges the importer’s account and remits the
money to the exporter
Question: 2
Answer (A) is correct.
A problem in an international sale is whether the seller will be paid. The problem is solved
by using a letter of credit and a bill of lading. A bill of lading is a document of title evidencing
receipt of goods by the carrier for shipment. A bill of lading is not an agreement with a bank
to pay drafts or other demands for its customer. Such an agreement is a letter of credit (UCC
5- 103). A seller is paid when (s)he presents the bill of lading to the buyer’s bank
Question: 3
Answer (C) is correct.
A sale on open-account is risky because the exporter merely ships the goods to the
importer, who signs an invoice acknowledging receipt. Thus, the exporter is not assured of
payment if the importer defaults. Such an arrangement is most likely if the parties have
previously transacted business.
Question: 4
Answer (C) is correct.
Commercial drafts are commonly used in international business transactions. Such drafts
are three-party instruments: The seller-exporter is the drawer and payee, and the buyer-
importer is the drawee. A draft contains an order by the drawer to the drawee to pay a fixed
amount of money to the payee.
Question: 5
Answer (D) is correct.
Production costs in the home country are already lower than those in the U.S. Widening this
gap would not serve the firm’s interests
Question: 6
Answer (D) is correct.
Adverse effects on the home country include (1) loss of jobs and tax revenues, (2) instability
caused by reduced flexibility of operation in a foreign political system, (3) the risk of
expropriation, and (4) the competitive advantage of multinationals over domestic rivals
Question: 7
Answer (C) is correct.
The pound costs more on the forward market than it does on the spot market, indicating an
anticipated gain in purchasing power (resulting in a forward premium).
Question: 8
Answer (A) is correct.
The International Monetary Fund has only temporary influence, if any, on the setting of
exchange rates.
Question: 9
Answer (A) is correct.
The decline in the value of the dollar reduces the prices of U.S. goods to foreigners and will
tend to increase exports. Also, foreign goods will be higher priced (in dollars) and imports
from foreign countries will tend to decrease, thus helping the U.S. balance of payments.
Question: 10
Answer (C) is correct.
A decline in the value of the dollar relative to other currencies lowers the price of U.S. goods
to foreign consumers. Thus, exporters of goods produced in the U.S. benefit.
Simultaneously, a low value for the dollar decreases imports by making foreign goods more
expensive.
Question: 11
Answer (A) is correct.
Today’s international monetary system usually permits exchange rates to float freely.
However, central banks occasionally intervene to avoid large fluctuations. Accordingly, the
system is called a managed or dirty float system
Question: 12
Answer (D) is correct.
A forward currency premium or discount is calculated by multiplying the percentage
spread by the number of forward periods in a year:
In this case, the calculation is as follows: Forward premium
= [(¥102.5 – ¥100) ÷ ¥100] × (360 ÷ 90)
= 0.025 × 4
= 10%
Question: 13
Answer (C) is correct.
Exchange rates “float” when they are set by supply and demand, not by agreement among
countries. In a managed float, central banks buy and sell currencies at their discretion to
avoid erratic fluctuations in the foreign currency market. The objective of such transactions
is to “manage” the level at which a particular currency sells in the open market. For
instance, if there is an oversupply of a country’s currency on the foreign currency market,
the central bank will purchase that currency to support the market
Question: 14
Answer (A) is correct.
The balance of trade is the difference between imports and exports of goods and services
over a given period (the balance of payments is more comprehensive, embracing all
transfers made between two countries, including capital movements). A country’s balance
of trade is decreased (worsened) by imports
Question: 15
Answer (B) is correct.
Dividing $100,000 by £20,000 produces an exchange rate of $5 to the pound.
Question: 16
Answer (C) is correct.
When one currency appreciates, other currencies lose buying power. Thus, if the dollar
appreciates against the yen, Japanese customers will find American goods more expensive
Question: 17
Answer (C) is correct.
At a 1-for-9 rate, the price in U.S. dollars is $5, calculated by dividing 45 pesos by 9.
Question: 18
Answer (A) is correct.
If the foreign currency weakens compared with the U.S. dollar, the U.S. dollar will have
more buying power in the foreign company’s country. Thus, the foreign company will be
able to sell more products than the U.S. company for the same amount of dollars.
Question: 19
Answer (D) is correct.
A receivable or payable denominated in a foreign currency must be adjusted to its current
exchange rate at each balance sheet date. The resulting gain or loss should ordinarily be
reflected in current income. It is the difference between the spot rate on the date the
transaction originates and the spot rate at year-end. Thus, the Year 1 transaction loss for the
corporation is $1,500 [10,000 units × ($0.55 – $0.70)].
Question: 20
Answer (D) is correct.
The balance of payments deficit is defined as the excess of imports, private capital outflows,
grants, and remittances over exports and private capital inflows. When there is a deficit in
the balance of payments, fewer domestic goods and services may have been sold abroad
than were imported and/or foreigners may have invested less capital in the domestic
country than domestic citizens invested abroad. For this reason, a deficit is considered an
un-favorable balance of payments. Just the opposite is true for a surplus in the balance of
payments.
Question: 21
Answer (A) is correct.
Since it now takes fewer euros to buy a single dollar, the dollar has declined in value relative
to the euro; i.e., the euro has gained purchasing power. As a result, imports from Europe
will become more expensive and will tend to decrease
Question: 22
Answer (C) is correct.
The exchange rate for the Australian dollar is higher in the forward market than the spot
market; the Australian dollar is therefore trading at a forward premium. From this, it follows
that the U.S. dollar is trading at a forward discount.
Question: 23
Answer (B) is correct.
The corporation will pay fewer dollars for 10,000 euros in 30 days than it will today. In 30
days, it can pay $1.2313 U.S. dollars per euro, but if it were to pay today using the spot rate,
it would pay $1.2535 U.S. dollars per euro. The bill is at a fixed price. Ignoring interest rates,
it is cheaper in dollars for the corporation to pay the bill in 30 days. Therefore, the
purchasing power of the dollar increases over the next 30 days.
Question: 24
Answer (B) is correct.
A dollar fetches fewer pounds in the forward market than in the spot market. By the same
token, it takes fewer pounds to buy a dollar in the forward market than it does in the spot
market. The pound is thus expected to gain purchasing power with respect to the dollar and
is therefore selling at a forward premium.
Question: 25
Answer (B) is correct.
An expanding U.S. economy would result in greater demand for raw materials from these
countries. Also, since the money supply and interest rates are inversely proportional (when
the money supply is rising, interest rates are falling), less developed nations could borrow
again at lower rates. Moreover, if the money supply is rising, inflation might increase and
U.S. dollars would become cheaper, thereby easing the burden of foreign debtors with
obligations payable in dollars.
