Chapter 6 SBD Answers

Chapter 6 SBD Answers - be overwhelmed by other economic...

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Chapter 6: Small Business Dilemma Assessment of Central Bank Intervention by the Sports Exports Company Jim Logan, owner of the Sports Exports Company, is concerned about the value of the British pound over time because his firm receives pounds as payment for the footballs exported to the United Kingdom. He recently read that the Bank of England (the central bank of the United Kingdom) is likely to use direct intervention in the foreign exchange market by flooding the market with British pounds. 1. Forecast whether the British pound will weaken or strengthen based on the information provided. ANSWER: If the Bank of England floods the foreign exchange market with pounds, there will be downward pressure on the value of the pound. However, this pressure could
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Unformatted text preview: be overwhelmed by other economic forces that place upward pressure on the value of the pound. 2. How would the performance of the Sports Exports Company be affected by the Bank of England's policy of flooding the foreign exchange market with British pounds (assuming that it does not hedge its exchange rate risk)? ANSWER: The performance of the Sports Exports Company would be adversely affected by the Bank of England's policy to flood the foreign exchange market with pounds because this policy places downward pressure on the value of the pound. If the pound weakens, the receivables of the Sports Exports Company will convert to fewer dollars, which reflects a reduction in revenue....
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