Question 1 A German firm is attempting to determine the euro/pound exchange rate

Question

Question 1

A German firm is attempting to determine the euro/pound exchange rate and has the following exchange rate information: USD/pound = $1.5509/£ and the USD/euro rate = $1.2194/€. Therefore, the euro/pound rate must be:

a)£1.2719/€.

b)€0.7863/£.

c)€0.7316/£.

d)€1.2719/£.

Question 2

Which of the following pieces of U.S. legislation was developed and passed in response to the 2008-2009 international credit crisis?Question 2

a)Dodd-Frank Wall Street Reform and Consumer Protection Act

b)Gramm-Leach-Bliley Financial Services Modernization Act

c)Depository Institutions Deregulation and Monetary Control Act

d)The Glass-Steagall Act

Question 3

Define patient and impatient capitalism and discuss how each may lead to different decision-making in the shareholder wealth maximization model.

Question 4

What is the Official Reserves Account (ORA), and why is it more important for countries under a fixed exchange rate regime than for ones under a floating exchange rate regime?

Explanation / Answer

1 USD/POUND 1.5509 USD/EURO 1.2194 1.271855 Answer is D. 2 a)Dodd-Frank Wall Street Reform and Consumer Protection Act 3 –Impatient capitalism focuses on the short-term sometimes at the expense of long-term value –Patient Capitalism focuses on long term shareholder wealth maximization The investor is willing to make a financial investment in a business with no expectation of turning a quick profit. Willingness to forgo maximum financial returns for social impact, and an unwillingness to sacrifice the interests of the end customer for the sake of shareholders Greater tolerance for risk than traditional investment capital Longer time horizons for return of capital Intensive support of management as they grow their enterprise 4 Official reserve account forms a special feature of the capital account. This account records the changes in the part of the reserves of other countries that is held in the country concerned. These reserves are held in three forms: in foreign currency, usually but not always the US dollars, as gold, and as Special Deposit Receipts (SDRs) borrowed from the IMF The change in the reserves account measures a nation’s surplus or deficit on its current and capital account transactions by netting reserve liabilities from reserve assets. For example, a surplus will lead to an increase in official holdings of foreign currencies and/or gold; a deficit will normally cause a reduction in these assets. Fixed exchange regime countries like china need to buy or sell FX reserves in order to maintain the FX rate,unlike floating exchange rate countries where the exchange rate appretiates or depretiats so no need to buy or sell FX reserves

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