【正文】 and(d) derive lessons from the Mexican experience that may be useful for other developing countries.In your report, you may identify and address any other relevant issues concerning Mexico’s balance of payment problem.IM16Suggested Solution to Mexico’s BalanceofPayments ProblemTo solve this case, it is useful to review Chapter 2, especially the section on the Mexican peso crisis. Despite the fact that Mexico had experienced continuous trade deficits until December 1994, the country’s currency was not allowed to depreciate for political reasons. The Mexican government did not want the peso devaluation before the Presidential election held in 1994. If the Mexican peso had been allowed to gradually depreciate against the major currencies, the peso crisis could have been prevented. The key lessons that can be derived from the peso crisis are: First, Mexico depended too much on shortterm foreign portfolio capital (which is easily reversible) for its economic growth. The country perhaps should have saved more domestically and depended more on longterm foreign capital. This can be a valuable lesson for many developing countries. Second, the lack of reliable economic information was another contributing factor to the peso crisis. The Salinas administration was reluctant to fully disclose the true state of the Mexican economy. If investors had known that Mexico was experiencing serious trade deficits and rapid depletion of foreign exchange reserves, the peso might have been gradually depreciating, rather than suddenly collapsed as it did. The transparent disclosure of economic data can help prevent the pesotype crisis. Third, it is important to safeguard the world financial system from the pesotype crisis. To this end, a multinational safety needs to be in place to contain the pesotype crisis in the early stage. CHAPTER 5 THE MARKET FOR FOREIGN EXCHANGESUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTER QUESTIONS AND PROBLEMSQUESTIONS1. Give a full definition of the market for foreign exchange.Answer: Broadly defined, the foreign exchange (FX) market enpasses the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, and trading in foreign currency options and futures contracts.2. What is the difference between the retail or client market and the wholesale or interbank market for foreign exchange?IM17Answer: The market for foreign exchange can be viewed as a twotier market. One tier is the wholesale or interbank market and the other tier is the retail or client market. International banks provide the core of the FX market. They stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, corporations or individuals, in conducting foreign merce or making international investment in financial assets that requires foreign exchange. Retail transactions account for only about 14 percent of FX trades. The other 86 percent is interbank trades between international banks, or nonbank dealers large enough to transact in the interbank market.3. Who are the market participants in the foreign exchange market?Answer: The market participants that prise the FX market can be categorized into five groups: international banks, bank customers, nonbank dealers, FX brokers, and central banks. International banks provide the core of the FX market. Approximately 100 to 200 banks worldwide make a market in foreign exchange, ., they stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, the bank customers, in conducting foreign merce or making international investment in financial assets that requires foreign exchange. Nonbank dealers are large nonbank financial institutions, such as investment banks, mutual funds, pension funds, and hedge funds, whose size and frequency of trades make it cost effective to establish their own dealing rooms to trade directly in the interbank market for their foreign exchange needs.Most interbank trades are speculative or arbitrage transactions where market participants attempt to correctly judge the future direction of price movements in one currency versus another or attempt to profit from temporary price discrepancies in currencies between peting dealers.FX brokers match dealer orders to buy and sell currencies for a fee, but do not take a position themselves. Interbank traders use a broker primarily to disseminate as quickly as possible a currency quote to many other dealers.Central banks sometimes intervene in the foreign exchange market in an attempt to influence the price of its currency against that of a major trading partner, or a country that it “fixes” or “pegs” its currency against. Intervention is the process of using foreign currency reserves to buy one’s own currency in order to decrease its supply and thus increase its value in the foreign exchange market, or alternatively, selling one’s own currency for foreign currency in order to increase its supply and lower its price.4. How are foreign exchange transactions between international banks settled?IM18Answer: The interbank market is a work of correspondent banking relationships, with large mercial banks maintaining demand deposit accounts with one another, called correspondent bank accounts. The correspondent bank account work allows for the efficient function。(b) investigate the causes of Mexico’s balance of payments difficulties prior to the peso devaluation。IM1CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRMSUGGESTED ANSWERS TO ENDOFCHAPTER QUESTIONSQUESTIONS1. Why is it important to study international financial management?Answer: We are now living in a world where all the major ec