Foreign Currency Transactions
the Following Table Summarizes the Facts of Five

question 77

Essay

Foreign currency transactions
The following table summarizes the facts of five independent cases (labeled a through e) of American companies engaging in credit transactions with foreign corporations while the foreign exchange rate is fluctuating:
Instructions:
After evaluating the information about each case, fill the blank space that has been left in one of the four columns denoted by a yellow color.
The content of each column and the word or words that you should enter in the blank spaces are described below:
Column 1 indicates the type of credit transaction in which the American company engaged with the foreign corporations. The answer entered in this column should be either "Sales" or "Purchases."
Column 2 indicates the currency in which the invoice price is stated. The answer may be either "U.S. dollars" or "Foreign currency."
Column 3 indicates the direction in which the foreign currency exchange rate has moved between the date of the credit transaction and the date of settlement. The answer in this column may be either "Rising" or "Falling."
Column 4 indicates the effect of the exchange rate fluctuation upon the income of the American company. The answers entered in this column are to be selected from the following: "Gain," "Loss," or "No effect."
$$\begin{array} { | c | c | c | c | c | } \hline&&{ \text { Column } } \\\hline & \text { Type of Credit } & \text { Currency Used in } & \text { Exchange Rate } & \text { Effect on } \\\hline & \text { Transaction } & \text { Contract } & \text { Direction } & \text { Income } \\\hline \text { Case } & 1 & 2 & 3 & 4 \\\hline & & & & \\\hline \text { (a.) } & \text { Sales } & \text { Foreign currency } & \text { Falling } & \\\hline \text { (b.) } & \text { Purchases } & \text { U.S. dollars } & \text { Rising } & \\\hline \text { (c.) } & & \text { Foreign currency } & \text { Rising } & \text { Loss } \\\hline \text { (d.) } & \text { Sales } & & \text { Falling } & \text { No effect } \\\hline \text { (e.) } & \text { Purchases } & \text { Foreign currency } & & \text { Gain } \\\hline & & & & \\\hline\end{array}$$

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Definitions:

Real Rate of Return

The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or other external effects.

Annual Interest Rate

The percentage of a sum of money charged for its use, calculated on an annual basis.

Inflation Rate

The rate at which the general level of prices for goods and services is rising, hence, eroding purchasing power.

Real Rate of Return

The rate of return on an investment after adjusting for inflation, showing the actual increase in purchasing power.