Reference no: EM132886103

Question 1: Suppose the rate of inflation in Mexico will run about 3 percent higher than the U.S. inflation rate over the next several years. All other things being the same, what will happen to the Mexican peso versus dollar exchange rate? What relationship are you relying on in answering?

Question 2: If you are an exporter who must make payments in foreign currency three months after receiving each shipment and you predict that the domestic currency will appreciate over this period, is there any value in hedging your currency exposure?

Question 3: The same television set costs $500 in the United States, €450 in France, £300 in the United Kingdom, and ¥100,000 in Japan. If the law of one price holds, what are the euro-dollar, pound-dollar, and yen-dollar exchange rates? Why might the law of one price fail?

Question 4: Can purchasing power parity help predict short-term movements in exchange rates?

Question 5: During the 1990s, the U.S. Secretary of the Treasury often stated, "a strong dollar is in the interest of the United States."
Is this statement true? Explain your answer.