A German importer of English clothing has contracted to pay an amount fixed in British pounds 3 months from now. lithe importer worries that the euro may depreciate sharply against the British pound in the interim, it would be well advised to:
Answer(s): A
The importer should buy pounds now. If the euro depreciates against the pound in the next 90 days, the gain on the forward exchange contract would offset the loss from having to pay more euros to satisfy the Ii ability.
An entity has a foreign-currency-denominated trade payable, due in 60 days. To eliminate the foreign currency exchange-rate risk associated with the payable, the entity could:
Answer(s): C
The entity can arrange to purchase the foreign currency today rather than in 60 days by buying the currency in the forward market. This hedging transaction will eliminate the exchange-rate risk associated with the trade payable.
Which of the following is a tariff?
Answer(s): B
Tariffs are excise taxes on imported goods imposed either to generate revenue or protect domestic producers. Thus, consumption taxes on imported goods are tariffs.
Which of the following is a direct effect of imposing a protective tariff on an imported product?
A protective tariff adds to the purchase price of imported goods. If an imported good's sales price is higher than a comparable, less expensive domestic good, consumers will purchase the domestic good. Thus, the direct effect of imposing a protective tariff on an imported good is lower domestic consumption.
A direct effect of imposing a protective tariff on an item for which there are both foreign and domestic producers is that domestic producers will sell, <List A> of the item while domestic consumers consume ,List B> of the item.
Domestic producers are not subject to the tariff and will therefore have a price advantage over their foreign competitors. However, absent such competition, the domestic price of the item will be higher. Domestic producers will sell more at a higher price, and domestic consumers will consume less following the price increase.
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