Question Details

MGT/179 MGT179 MGT 179 Week 5 Discussion Group 2

Q1. 
Quantitative Easing, Inflation, and the Value of the U.S. Dollar: What does the 2010 purchase by the Federal Reserve of $600 billion in U.S. government bonds tell you about U.S. fiscal policy?  What was the Federal Reserve trying to accomplish? Why did the Federal Reserve receive so much criticism for its policy of quantitative easing?  Do you agree with the critics?  What was the effect of QE2 and QE3? 
Q2.

Volkswagen- Hedging Strategy: Explain how Volkswagen- failure to fully protect itself against foreign exchange fluctuations had a negative effect on the company.  What can Volkswagen and other companies learn from this experience?
a) Why do you think management at Volkswagen decided to hedge only 30 percent of their foreign currency exposure in 2003?  What would have happened if they had hedged 70 percent of their exposure?
b) Why do you think the value of the U.S. dollar declined against that of the Euro in 2003?
c) Apart from hedging through the foreign exchange market, what else can Volkswagen do to reduce its exposure to future declines in the value of the U.S. dollar against the euro?
Q3. 

I (Professor Lynch) spent a sabbatical year from the Foreign Service in 1993/4 at Caterpillar Financial Services. One of my tasks was to help them set up a Finance Company subsidiary in Mexico. In a scouting trip to Mexico I learned that the wealthy owners of the Caterpillar dealerships were sending their money to the US in anticipation of a devaluation that occurred every six years with the change of Presidents. The Wall Street money traders I talked with said that the peso would not be devalued. I recommended that Caterpillar put off its investment in the subsidiary until after the dust settled with the elections. When it finally did so, it got in for 45% less, because of the decline in the dollar.
a)      What led to Mexico- 1995 financial crisis?  What challenges face governments dealing with a financial crisis like the one that Mexico experienced? 
b)      Why did the United States provide assistance to Mexico?  Why was it important to the United States to stabilize Mexico?
c)       Is there any relation of the crisis to the increase in illegal migration to the US in the late 1990- and early 2000s? How about to the growth of the drug trade?
Q4.

In the early part of the decade, the yen was relatively weak relative to the U.S. dollar, but strengthened at the end of the decade as investors reacted to changes in interest rates brought on by the global financial crisis.  The changing value of the yen had direct implications for companies like Toyota.  Discussion of the case can revolve around the following questions: 
a)       Why did the yen carry trade work during the early 2000s?  Why did it stop working after 2008?
b)      What drove an increase in the value of the yen between 2008 and 2011?
c)       Why did the policy of the Abe government to purchase government securities help drive down the value of the yen?  What was the mechanism at work here?
d)      Donald Trump has said that the Japanese have been involved in currency manipulation, apparently referring to this. Is he correct?
Q5.

2008 Economic Crisis in Iceland
a)       What type of exchange rate system does Iceland follow?  Explain how this system helped the country to recover from the 2008-2009 global financial crisis.
b)      How would you characterize the financial crisis in Iceland in 2008?  Was it a currency crisis, a banking crisis, or a foreign debt crisis?  Explain your response.