Briefly discuss the risks of unexpected changes in exchange rates and how these risks affect the use by a multinational enterprise (MNE) of borrowing foreign currency to fund its foreign affiliates.
What will be an ideal response?
POSSIBLE RESPONSE: Unexpected changes in exchange rates can alter the value of the MNE's direct investments in the foreign country. If the foreign currency depreciates relative to the MNE's home currency, the value of the MNE's foreign assets, as measured in terms of the home currency, declines. A good risk-reducing strategy for a parent company that has foreign-currency assets in its affiliates is to take on foreign-currency liabilities, by using borrowing in the foreign currency to finance its assets. This type of "hedge" would help minimize the risk associated with a loss in the value of the company's foreign-currency assets. The decline in the value of the foreign-currency assets (what it owns) would be offset by a decline in the value of the foreign-currency liabilities (what it owes).
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Which of the following statements is true of marginal analysis?
A) Marginal analysis is a tool used in optimization in levels. B) Marginal analysis compares the consequences of doing one more step of something. C) Marginal analysis of alternatives will mostly give an outcome different from optimization in levels. D) Marginal analysis involves the calculation of total net benefits of all the available alternatives.
When economic growth occurs, the
A) economy moves along its production possibilities frontier. B) production possibilities frontier shifts outward. C) production possibilities frontier becomes steeper. D) production possibilities frontier shifts outward but no longer limits the amount that can be produced.