Question

please answer all parts on a piece of paper

Exercises: Balance of payments EXERCISE 1 Describe how these transactions should affect present and future exchange rates. a) Joseph E. Seagram & Sons imports a year's supply of French champagne. Payment in euros is due immediately b) Korean Airlines buys five Boeing 747s. As part of the deal, Boeing arranges a loan to KAL for the purchase amount from the U.S. Export-Import Bank. The loan is to be paid back over the next seven years with a two-year grace period.

Answer 1

Part (a)

Payment in Euro is due immediately. So demand for Euro will increase. So the Euro will strengthen or appreciate with respect to dollar. Hence, the present spot exchange rate of Euro (in terms of dollar) should increase and the future exchange rate should remain unaffected.

Part (b)

The spot exchange rate should remain unaffected.

Demand for dollars will increase in future as KAL repays the loan in dollars. KAL will need dollars to repay the loan and hence dollar with strengthen in future. Hence, future exchange rate for dollars (in terms of Korean currency) will increase.