Assume that you run a travel agency known as 4D Travel (Dalal’s Deliciously Delirious Departures) that specializes in travel packages to Europe. The 4D team works with hotels in Europe, and based on...

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  1. Assume that you run a travel agency known as 4D Travel (Dalal’s Deliciously Delirious Departures) that specializes in travel packages to Europe. The 4D team works with hotels in Europe, and based on the price of a room in euros you come up with a price in dinars to charge your clients; the same would go for local transportation, mealsetc. You book these trips an average of three months in advance and you and your clients agree on a price in dinars at the time of the booking. 4D, of course, will then have to pay the bills when the services are rendered in three months. Your doors opened in 2008 and you have watched exchange rates between the dinar and the euro bounce around constantly. Over the years you have been in business you have had to deal with a strong euro (exchange rate of BD0.5902 per euro in 2008) and a weak euro (BD0.3707 per euro in the current market). This means, for example, that a hotel room that cost 200 euros per night would cost BD118.040 in 2008 but only BD74.140 today. Just for your information, I have pasted below the record of the $/€ exchange rate, showing that it moves around a lot. Explain, based on the four determinants/fundamentals of floating exchange rates, what in general may have caused these swings in the dollar/euro exchange rate (thus swings in the dinar/euro exchange rate). Then comment on what these swings in exchange rates would do to your business if you locked in a price for your clients months in advance and the exchange rate changed over those months. For example, what you if locked in a price in dinars for the trip and then the euro got much stronger? What if you lock in and the euro gets much weaker? Use hypothetical numerical examples as I do above to make your point and explain how this movement could hurt or help your travel agency’s financial health.

Answered 2 days AfterOct 20, 2022

Answer To: Assume that you run a travel agency known as 4D Travel (Dalal’s Deliciously Delirious Departures)...

Komalavalli answered on Oct 22 2022
42 Votes
The worth of a currency movement according to supply and demand in a floating exchange rate. The interaction of supply and demand factors in the market influences the value of money. The monetary value of a currency, instead of just federal action, reflects popular trust in the economy of that country.
Market attitude regarding a country's economy influences the strength or weakness of a floating currency. For instance, if the economy believes that a nation's leader is in doubt, the currency will decrease. Although the government does not totally control the floating exchange rate, it can interfere when the currency becomes too weak or too strong to...
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