ABC Software is a producer of educational software for children below the age of twelve. The company has operations in Switzerland and would like to expand its foreign operations with a new facility in China. The company's financial advisors recommend that ABC Software conduct most of its business in a vehicle currency. Which of the following is true of vehicle currencies?
A) A vehicle currency is a contract that requires the exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate.
B) The U. S.dollar, Australian dollar, Japanese yen, and British pound are all examples of vehicle currencies.
C) The U. S.dollar became a vehicle currency after World War II when all of the world's major currencies were tied indirectly to the dollar because it was the most stable currency.
D) The Chinese yuan is expected to become a vehicle currency in the near future as China's position in world trade continues to grow.

C) The U.S.dollar became a vehicle currency after World War II when all of the world's major currencies were tied indirectly to the dollar because it was the most stable currency.

Explanation:

The option among the given choices that most appropriately defined a vehicle currency is that: The U.S.dollar became a vehicle currency after World War II when all of the world's major currencies were tied indirectly to the dollar because it was the most stable currency.

A vehicle currency is a legal tender that is used as a common denominator and basis for exchange in international transactions

C) The U.S.dollar became a vehicle currency after World War II when all of the world's major currencies were tied indirectly to the dollar because it was the most stable currency.

Explanation:

The simple fact that 60% of all US currency is held by non-US citizens or residents, and the fact that the US economy is the largest in the world, gives us an idea that the world used the US dollar as the global currency. Even when the purchasing power parity is calculated to level off differences in prices between nations, the US currency is the base currency. Even before WWII, the US dollar and the British pound were the most important currencies in the world, but after the was, only the dollar remained as the world's preferred currency.

A vehicle currency is a currency used in international transactions (trade and other financial transactions) even if no country involved in the transaction had the US dollar as its official currency, e.g. American companies cannot consider the US dollar a vehicle currency because it is their own domestic currency.

For a while the euro, the yen, and now the yuan, are trying to become vehicle currencies, but they are still far away form reaching the same status as the US dollar. E.g. due to the recent world crisis, all currencies have depreciated against the US dollar because everyone is desperate to purchase dollars, even foreign governments.

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