24-87 at the End of the Year,the Exchange Rate Is

question 68

Multiple Choice

24-87 At the end of the year,the exchange rate is €2/$.What are the losses and gains to each bank as a result of this swap compared to the scenario without the swap.

• A)With the agreement,Bank Dresdner pays €2.5 million less while Bank USA pays $1.25 million more.
• B)With the agreement,Bank Dresdner pays €2.5 million more while Bank USA pays $1.25 million less.
• C)With the agreement,Bank USA pays $3.75 million less while Bank Dresdner pays €7.5 million more.
• D)With the agreement,Bank USA pays $3.75 million more while Bank Dresdner pays €7.5 million less.
• E)Each bank pays the same because the exchange rate affects both parties equally.

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Definitions:

Opportunity Cost

The loss of potential gain from other alternatives when one alternative is chosen.

Comparative Advantage

The ability of an entity to produce goods or services at a lower opportunity cost than others, leading to more efficient trade.

Absolute Advantage

The ability of a party, company, or country to produce a good or service more efficiently than its competitors using the same amount of resources.

Comparative Advantage

The economic principle that a country or entity should produce goods and services for which it has a lower opportunity cost than its trading partners.