A UK-based luxury watchmaker imports 40% of its component parts from Switzerland (invoiced in Swiss Francs, CHF\text{CHF}CHF) and exports 70% of its finished watches to the United States (invoiced in US Dollars, USD\text{USD}USD).
If the Pound Sterling (GBP\text{GBP}GBP) undergoes a significant appreciation against both the CHF\text{CHF}CHF and the USD\text{USD}USD, which of the following is the most likely consequence for the business?
The sterling cost of importing Swiss components will rise, squeezing gross profit margins on all sales.
The price competitiveness of the watches in the US market will improve, leading to an increase in export sales volume.
The sterling value of sales revenue generated in the US will fall if the US dollar-denominated retail prices are kept constant.
The firm will be forced to raise its domestic sterling prices to maintain its overall operating profit margin.
30 exam-style questions on OCR A Level Economics Exchange rates. Each one has a worked solution and a mark scheme showing where the marks go.