Fin as 3 - BARSHA SHRESTHA Assignment 3 FIN 446 Chapter 10...

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BARSHA SHRESTHA Assignment 3 FIN 446 Chapter 10 Question 25: Potential Effect if the United Kingdom Adopted the Euro. The United Kingdom still has its own currency, the pound. The pound’s interest rate has historically been higher than the euro’s interest rate. The United Kingdom has considered adopting the euro as its currency. There have been many argument about whether it should do so. Use your knowledge and intuition to discuss the likely effects if the United Kingdom adopts the euro. For each of the 10 statement below, insert either increase or decrease in the first blank and complete the statement by adding a clear, short explanation(perhaps one to three sentences) of what the United Kingdom’s adoption of the euro would have that effect. To help you narrow your focus, follow these guidelines. Assume that the pound is more volatile that the euro. Do not base your answer on whether the pound would have been stronger than the euro in the future. Also, do not base your answer on an unusual change in economic growth in the United Kingdom or in the euro zone if the euro is adopted. a. The economic exposure of British firms that are heavy exporters to the euro zone would decrease because no exchange of currency would be needed. b. The translation exposure of firms based in the euro zone that have british susbsidiaries would decrease because there would be no need to translate the British financial statements anymore. c. The economic exposure of U.S. firms that conduct substantial business in the United Kingdom and have no other international business would decrease because the euro should be less volatile than the pound. d. The translation exposure of U.S. firms with British subsidiaries would decrease because the euro should be less volatile than the pound. e. The economic exposure of U.S firms that export to the United Kingdom and whose only other international business is importing from firms based in the euro zone would decrease because their euro outflow can offset some of the euro inflows . f. The forward discount on the forward rate paid by U.S. firms that periodically use the forward market to hedge payables of British imports would decline (or may even be a premium) because the euro’s interest rate is usually less than the pound’s interest rate.
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g. The earnings of a foreign exchange department of a British bank that executes foreign exchange transactions desired by its European clients would decrease because there would be a reduction in the foreign exchange needed. h.
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This note was uploaded on 06/10/2010 for the course FINANCE 442 taught by Professor Knight during the Spring '10 term at National University of Singapore.

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Fin as 3 - BARSHA SHRESTHA Assignment 3 FIN 446 Chapter 10...

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