FIN 438
In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.2519-$1.2523. The currency dealer would likely quote that as __________.
19-23
It is common practice among currency traders worldwide to both price and trade currencies against the U.S. dollar. Consider a currency dealer who makes a market in 5 currencies against the dollar. If he were to supply quotes for each currency in terms of all of the others, how many quotes (including both indirect and direct quotes) would he have to provide?
30, 15 exchange rates are possible among 6 currencies: (6 x 5)/2 = 15. Since exchange rates can be quoted either in direct or indirect terms, you will have 30 different quotes."
It is common practice among currency traders worldwide to both price and trade currencies against the U.S. dollar. In fact, 2019 BIS statistics indicate that about __________ of currency trading in the world involves the U.S. dollar on one side of the transaction.
88 percent
International trade is
an "increasing-sum" game at which all players become winners.
The Mexican Peso Crisis was touched off by
an unexpected announcement by the Mexican government to devalue the peso against the dollar by 14 percent.
The Sarbanes-Oxley Act of 2002
applies to listed companies.
Undoubtedly, we are now living in a world where all the major economic functions—consumption, production, and investment—
are highly globalized.
Gresham's Law states that
bad money drives good money out of circulation.
The Nestlé Corporation, a well-known Swiss MNC, used to issue two different classes of common stock, bearer shares and registered shares, and foreigners were allowed to hold only
bearer shares.
Suppose in order to defraud the shareholders, a manager sets up an independent company that he owns and sells the main company's output to this company. He would be tempted to set the transfer price
below market prices.
In the United States,
boards of directors are legally responsible for representing the interests of the shareholders. there is a correlation between underperforming firms and boards of directors who are not fully independent. due to the diffused ownership structure of the public company, management often gets to choose board members who are likely to be friendly to management.
An example(s) of a political risk is
both the expropriation of assets and adverse changes in tax rules are correct.
The difference between a broker and a dealer is
brokers bring together buyers and sellers, but carry no inventory; dealers stand ready to buy and sell from their inventory.
Most interbank trades are
speculative or arbitrage transactions.
Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso depreciates drastically against the U.S. dollar, as it did in December 1994. This means that
your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall.
Suppose that Great Britain is a major export market for your firm, a U.S.-based MNC. If the British pound depreciates against the U.S. dollar,
your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise, and to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same.
Using the table above, what is the bid price of euro in terms of pounds?
£0.7475/€, 1.4738 / 1.9717 = £0.7475
Using the table above, what is the ask price of euro in terms of pounds?
£0.7479/€, 1.4742 / 1.97112 = £0.7479
The $/CAD spot bid-ask rates are $0.7560-$0.7625. The 3-month forward points are 12-16. Determine the $/CAD 3-month forward bid-ask rates.
$0.7572-$0.7641, 0.7572 = 0.7560 + 0.0012 and 0.7641 = 0.7625 + 0.0016.
Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $1 = £5. What would an ounce of gold be worth in U.S. dollars?
$1.20
The $/€ spot exchange rate is $1.50/€ and the 90-day forward premium for the euro is 10 percent. Find the 90-day forward price for the euro.
$1.50375/€, Solve the following for X: 0.01 = ((x - 1.5)/1.5) × (360/90) and find X = 1.50375.
Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $5 = £1. What would an ounce of gold be worth in U.S. dollars?
$30.00, One gold ounce is equivalent to 6 pounds, which is equal to $30 (6 × 5).
Suppose the spot ask exchange rate, Sa($|£), is $1.90 = £1.00 and the spot bid exchange rate, Sb($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-ask spread?
$52,632, First, determine how many pounds can be purchased with the $10,000,000 under the ask rate. To do this, solve the following proportion for X: ($1.9 / £1) = ($10,000,000 / X), which results in X = £5,263,157.89. Next, find out how many dollars you will receive if you sell your recently purchased pounds using the bid rate. Solve the proportion for X: (1.89 / £1) = (X / £5,263,157.89). You will receive $9,947,368.41. Finally, subtract this from your original $10,000,000 to find how much is lost from the bid-ask spread. The penalty is $52,631.58, which rounds to $52,632.
In the United States, managers are bound by the "duty of loyalty" to serve the shareholders.
This is a legal obligation.
Prior to the 1870s, both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French franc is pegged to gold at 90 francs per ounce and to silver at 6 francs per ounce of silver, and the German mark pegged to silver at 1 mark per ounce of silver. What would the exchange rate between the U.S. dollar and German mark be under this system?
1 German mark = $2, $30 is equivalent to 90 Francs, which can be converted to 15 ounces of silver. Fifteen ounces of silver is equal to 15 marks, meaning $30 = 15 marks, or the exchange rate is $2 per mark.
Prior to the 1870s, both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French franc is pegged to gold at 90 francs per ounce and to silver at 9 francs per ounce of silver, and the German mark pegged to silver at 1 mark per ounce of silver. What would the exchange rate between the U.S. dollar and German mark be under this system?
1 German mark = $3, $30 is equivalent to 90 Francs, which is equivalent to 10 ounces of silver. Ten ounces of silver is equal to 10 marks, meaning $30 = 10 marks, or the exchange rate is $3 per mark.
What is the relative price of a pound of butter in terms of guns in North Carolina?
1 pound of butter costs 0.33 guns., In North Carolina, it costs 0.33 (250/750) guns to produce one pound of butter.
Why is it rational to make shareholders "weak" by giving control to the managers of the firm
All of the options are explanations for the separation of ownership and control.
Self-interested managers may be tempted to
All of the options are potential abuses that self-interested managers may be tempted to visit upon shareholders.
Suppose you are the CEO of company A, and you serve on the board of company B, while the CEO of B is on your board.
This is a potential conflict of interest for both parties.
You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.25 how can you make money?
Buy euro at $1.50/€, buy £ at €1.25/£, sell £ at $2/£., Calculate the actual cross rate. S(€/£) = S($/£) / S($/€) = ($2 / 1.5) = €1.33. Thus, you now know that the euro is undervalued with respect to pounds under the cross rate offered by the bank, meaning you should buy the euro, convert to pounds, and finally convert back to dollars.
The current exchange rate is €1.00 = $1.50. Compute the correct balances in Bank A's correspondent account(s) with Bank B if a currency trader employed at Bank A buys €100,000 from a currency trader at Bank B for $150,000 using its correspondent relationship with Bank B.
Bank A's dollar-denominated account at B will fall by $150,000.
The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's correspondent account(s) with Bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at Bank B for $90,000 using its correspondent relationship with Bank B.
Bank B's pound-denominated account at A will fall by £45,000. Bank A's pound-denominated account at B will rise by £45,000. Bank B's dollar-denominated account at A will rise by $90,000. Bank A's dollar-denominated account at B will fall by $90,000.
Which of the following statements regarding triangular arbitrage true?
Both A and B - The purpose is to earn an arbitrage profit via trading among three currencies, where the direct cross-exchange rate between the second and the third currency is not in alignment with the implied cross-exchange rate. It can involve trading out of the US dollar into a second currency, then trading it for a third currency, which is in turn traded for US dollars.
Bank dealers in conversations among themselves use a shorthand notation to quote bid and ask forward prices in terms of forward points. This is convenient because
Both B and C - forward points may change faster than spot and forward quotes. forward points may remain constant for long periods of time, even if the spot rates change frequently.
The Bretton Woods system was named after
Bretton Woods, New Hampshire, where the Articles of Agreement of the International Monetary Fund (IMF) were hammered out.
You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money?
Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£, Calculate the implied cross-rate: S(€/£) = S($/£) / S($/€) = ($2 /£)/($1.60/€) = €1.25/£. The implied cross-rate for pound in terms of euros (€1.25/£) is greater than the quoted cross-rate (€1.20/£). Thus, you now know that the pound is undervalued against the euro at the quoted cross-rate. Hence, you want to buy pounds and sell euros at the quoted cross-rate of €1.20/£. Since you are starting out with dollars, you should sell dollars and buy euros, then sell euros and buy pounds, and finally, sell pounds and buy dollars to realize arbitrage profit
The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?
Buy €1,000,000 forward for $1.50/€.
The G-7 is composed of
Canada, France, Japan, Germany, Italy, the U.K., and the United States.
Which is growing at a faster rate, foreign direct investment by MNCs or international trade?
FDI by MNCs
Financial development can contribute to economic growth in what way(s)?
Financial development enhances savings. Financial development enhances the efficiency of investment allocation through the monitoring and signaling functions of capital markets. Financial development channels savings toward real investments in productive capacities.
Which of the following are correct?
Fn (j/k) = Fn(j/$) / Fn (k/$)
Private benefits of corporate control will tend to be higher in
French civil law countries than in English common law countries.
The Cadbury Code has not been legislated into law, and compliance with the code is voluntary.
However, the London Stock Exchange (LSE) currently requires that each listed company show whether the company is in compliance with the code and explain why if it is not. Currently, 90 percent of all LSE-listed companies have adopted the Cadbury Code. This "comply or explain" approach has apparently persuaded many companies to comply rather than explain.
In what country do the three largest shareholders control, on average, about 60 percent of the shares of a public company?
Italy
What is the difference between control rights and cash flow rights?
Large investors may be able to derive private benefits from control, thus control rights can exceed cash flow rights.
The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You enter into a short position on €1,000. At maturity, the spot exchange rate is $1.60/€. How much have you made or lost?
Loss of $100, (1.5 × 1,000) = $1,500 and (1.6 × 1,000) = $1,600. $1,600 - $1,500 = $100.
Why do managers tend to retain free cash flow
Managers may not be acting in the shareholders best interest, and for a variety of reasons, want to use the free cash flow
Which state has a comparative advantage in producing beer in Case I?
North Dakota, To produce one additional unit of beer, it will cost South Dakota 4 bushels of wheat (4/1) and North Dakota 0.5 bushels of wheat (1/2). Given 0.5<4, North Dakota has the comparative advantage in beer production.
The SF/$ 180-day forward exchange rate is SF1.30/$ and the 180-day forward premium is 8 percent. What is the spot exchange rate?
SF1.25/$, Solve the following for X: 0.08 = ((1.3 - X)/X) × (360/180), and find X = 1.25.
The SF/$ spot exchange rate is SF1.25/$ and the 180-day forward premium is 8 percent. What is the outright 180-day forward exchange rate?
SF1.30/$, Solve the following for X: 0.08 = ((X - 1.25)/1.25) × (360/180), and find X = 1.3.
Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment.
Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360.
Suppose that Britain pegs the pound to gold at the market price of £6 per ounce, and the United States pegs the dollar to gold at the market price of $36 per ounce. If the official exchange rate between pounds and U.S. dollars is $5 = £1. Which of the following trades is profitable
Start with $500 and trade for £100 at the official exchange rate. Redeem the £100 for 16 2/3 ounces of gold. Trade the gold for $600.
The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.52/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market?
Take a long position in a forward contract on €1,000,000 at $1.50/€.
Advantages of a flexible exchange rate include which of the following?
The government can use monetary and fiscal policies to pursue whatever economic goals it chooses. Easier external adjustments. National policy autonomy.
Consider the supply-demand framework for the British pound relative to the U.S. dollar shown in the following chart. The exchange rate is currently $1.80 = £1.00. Which of the following is correct?
To "fix" the exchange rate at $1.80 = £1.00, the U.S. government could use contractionary fiscal policy to shift the demand curve to the left. To "fix" the exchange rate at $1.80 = £1.00, the Federal Reserve could use contractionary monetary policy to shift the demand curve to the left. The British Government could use fiscal or monetary policy to shift the supply curve to the right to fix the exchange rate to $1.80 = £1.00.
Another name for the incompatible trinity is the
Trilemma.
The FX market is not only the largest financial market in the world, but also:
a decentralized market with a wide variety of market participants and limited transparency.
Free cash flow refers to
a firm's funds in excess of what's needed for undertaking all profitable projects.
A currency board arrangement is
a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation.
Suppose in order to defraud the shareholders, a manager sets up an independent company that he owns and buys one of the main company's inputs of production from this company. He would be tempted to set the transfer price
above market prices.
The major components of the Sarbanes-Oxley Act are
accounting regulation: The creation of a public accounting oversight board charged with overseeing the auditing of public companies, and restricting the consulting services that auditors can provide to clients. audit committee: The company should appoint independent "financial experts" to its audit committee. executive responsibility: Chief executive and finance officers (CEO and CFO) must sign off on the company's quarterly and annual financial statements. If fraud causes an overstatement of earnings, these officers must return any bonuses. internal control assessment: Public companies and their auditors should assess the effectiveness of internal control of financial record keeping and fraud prevention.
In the graph, X, Y, and Z represent
alignment, entrenchment, alignment.
Negotiation of the terms of Brexit with the EU include which of the following key agreements?
all of the above - an end to free movement of people a customs union between the UK and the EU should be in place until an alternative long-term relationship can be established no hard border between Northern Ireland and the Republic of Ireland
The euro-pound cross exchange rate can be computed as:
all of the options
Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of textiles or 5 pounds of food per unit of input.
all of the options - Country B is relatively more efficient than Country A in the production of food. Country A has an absolute advantage over Country B in the production of food and textiles. Country A is relatively more efficient than Country B in the production of textiles. Explanations - To find the opportunity cost of producing one additional pound of food for either country, divide the textile output by food output for each country for one unit of production. For Country A, it costs 10/6 = 1.67 yards of textiles to produce one additional pound of food, and for Country B, it costs 8/5 = 1.6 yards of textiles to produce one additional pound of food. Thus, Country B is relatively more efficient than Country A in producing food as evidenced by the fact that 1.6 < 1.67. To find the opportunity cost of producing one additional yard of textiles for either country, divide the food output by textile output for each country for one unit of production. For Country A, it costs 6/10 = 0.6 pounds of food to produce one additional yard of textiles, and for Country B, is costs 5/8 = 0.625 pounds of food to produce one additional yard of textiles. Thus, Country A is relatively more efficient than Country B in producing textiles, as evidenced by the fact that 0.6 < 0.625.
What major dimension sets apart international finance from domestic finance
all of the options - Expanded opportunity set Market imperfections Foreign exchange and political risks
Deregulated financial markets and heightened competition in financial services provided an environment for financial innovations that resulted in the introduction of various instruments. Examples of these innovative instruments include
all of the options - currency futures and options, foreign stock index futures and options. international mutual funds, country funds, exchange traded funds. multicurrency bonds.
Financial managers of MNCs should
all of the options - deal with (and take advantage of) market imperfections. benefit from expanded investment and financing opportunities. learn how to manage foreign exchange and political risks using proper tools and instruments.
Deregulation of world financial markets
all of the options - has promoted competition among market participants. has encouraged developing countries such as Chile, Mexico, and Korea to liberalize by allowing foreigners to directly invest in their financial markets. provided a natural environment for financial innovations, like currency futures and options.
An MNC may gain from its global presence by
all of the options - pooling global purchasing power over suppliers. utilizing their technological and managerial know-how globally with minimum additional costs. spreading R&D expenditures and advertising costs over their global sales.
In the reality of corporate governance at the turn of this century,
all of the options have been true to a greater or lesser extent in the recent past.
Companies domiciled in countries with weak investor protection can reduce agency costs between shareholders and management
by listing their stocks in countries with strong investor protection.
During the period between World War I and World War II, many central banks followed a policy of sterilization of gold
by matching inflows and outflows of gold respectively with reductions and increases in domestic money and credit.
Since its inception the euro has brought about revolutionary changes in European finance. For example,
by redenominating corporate bonds and stocks from several different currencies into one common currency, the euro has precipitated the emergence of continent-wide capital markets in Europe that are comparable to U.S. markets in depth and liquidity.
Concentrated ownership of a public company
can be an effective way to alleviate the agency problem between shareholders and managers.
The theory of comparative advantage
claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production.
In many countries, hostile takeovers are relatively rare. This is so partly because of
concentrated ownership in these countries, as well as cultural values and political environments disapproving hostile corporate takeovers.
In a hostile takeover attempt, the bidder typically
makes a tender offer to the target shareholders at a price substantially exceeding the prevailing share price.
Generally speaking, liberalization of financial markets when combined with a weak, underdeveloped domestic financial system tends to
create an environment susceptible to currency and financial crises.
Outside the United States and the United Kingdom,
diffused ownership of the company is more the exception than the rule.
Under the Bretton Woods system
each country established a par value for its currency in relation to the dollar. the U.S. dollar was pegged to gold at $35 per ounce. each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary
Under the Bretton Woods system
each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary. there was an explicit set of rules about the conduct of international monetary policies. the U.S. dollar was the only currency that was fully convertible to gold.
While debt can reduce agency costs between shareholders and management,
excessive debt may also induce the risk-averse managers to forgo profitable but risky investment projects, causing an underinvestment problem. Additionally, with debt financing, companies can misuse debt to finance corporate empire building.
In the interbank market, the standard size of a trade among large banks in the major currencies is
for the U.S.-dollar equivalent of $10,000,000.
Following the introduction of the euro, the national central banks of the euro-12 nations
formed the ESCB, which is analogous to the Federal Reserve System in the U.S., and continue to perform important functions in their jurisdictions.
Following the adoption of the Cadbury Code of Best Practice joint CEO/COB positions declined
from 37 percent of the companies before the adoption to 15 percent afterwards.
An "international" gold standard can be said to exist when
gold may be freely exported or imported. there is two-way convertibility between gold and national currencies at stable ratios gold alone is assured of unrestricted coinage.
Privatization
has spurred a tremendous increase in cross-border investment.
The World Trade Organization, WTO,
has the power to enforce the rules of international trade.
In countries with concentrated ownership,
hostile takeovers are quite rare.
The Dodd-Frank Act was passed
in 2010.
Gold was officially abandoned as an international reserve asset
in the January 1976 Jamaica Agreement.
A multinational firm can be defined as a firm that
incorporated in one country and has production and sales operations in several other countries.
Governance mechanisms that exist to alleviate or remedy the agency problem include:
independent board of directors & incentive contracts. concentrated ownership & Accounting transparency shareholder activism & overseas stock listings
Most foreign exchange transactions are for
interbank trades between international banks or nonbank dealers.
The forward market
involves contracting today for the future purchase or sale of foreign exchange at a price agreed upon today.
The spot market
involves the almost-immediate purchase or sale of foreign exchange.
The public corporation
is jointly owned by a (potentially) large number of shareholders. separates the ownership and control of a firm's assets. offers shareholders limited liability.
The goal of greater accounting transparency
is to reduce the information asymmetry between corporate insiders and the public, as well as discourage managerial self-dealings.
In the years leading to the collapse of the Bretton Woods system
it became clear that the dollar was overvalued.
In the EU, there is a
low degree of fiscal integration among EU countries.
At the outbreak of World War I
major countries such as Great Britain, France, Germany, and Russia imposed embargoes on the export of gold.
In countries like France and Germany,
managers have often viewed shareholders as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so forth.
The advent of the euro marks the first time that sovereign countries have voluntarily given up their
monetary independence to foster economic integration.
The international monetary system can be defined as the institutional framework within which
movement of capital is accommodated. international payments are made. exchange rates among currencies are determined.
Production of goods and services has become globalized to a large extent as a result of
multinational corporations' efforts to source inputs and locate production anywhere where costs are lower and profits higher.
The foreign exchange market closes
never.
Which of the following statements regarding ETF are not true?
none of the above are not true
A dealer in British pounds who thinks that the pound is about to appreciate
none of the options
The key requirements of the Sarbanes-Oxley Act state that
none of the options.
Today for an MNC to produce merchandise in one country on capital equipment financed by funds raised in a number of different currencies through issuing securities to investors in many countries, and then selling the finished product to customers in yet other countries is
not uncommon.
Robert A. Mundell won the Nobel Memorial Prize in Economic Science. He was
one of the intellectual fathers of both the new European common currency and Reagan-era supply-side economics.
A central bank can fix an exchange rate
only for as long as the market believes that it has the political will to do so.
Suppose that the United States is on a bimetallic standard at $30 to one ounce of gold and $2 for one ounce of silver. If new silver mines open and flood the market with silver,
only the silver currency will circulate.
Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian government has expropriated your firm's assets paying only €80,000 in compensation. This is an example of
political risk.
In the United States, it is well documented that
public scrutiny can help improve corporate governance. as public firms improve their corporate governance, the stock price goes up. boards dominated by their chief executives are prone to trouble.
For a U.S. trader working with American quotes, if the forward price is higher than the spot price
the currency is trading at a premium in the forward market.
Which of the following statements describes "activist shareholders"?
pursue their social and political agenda by promoting changes in companies' environmental, social, and governance practices. wish to persuade the companies to make commitments to corporate social responsibilities, including increasing gender and ethnic diversity on the board of directors
Benefits from adopting a common European currency include
reduced transaction costs increased price transparency, which promotes Europe-wide competition. elimination of exchange rate risk.
It is important for society as a whole to solve the agency problem, since the agency problem
retards economic growth. leads to waste of scarce resources. hampers capital market functions.
During the period of the classical gold standard (1875-1914) there were
stable exchange rates.
One of the objectives of corporate governance reform is to,
strengthen the protection of outside investors from expropriation by managers and controlling insiders.
Under a gold standard, if Britain exports more to France than France exports to Great Britain,
such international imbalances of payment will be corrected automatically. net export from Britain will be accompanied by a net flow of gold in the opposite direction this type of imbalance will not be able to persist indefinitely
Under a purely flexible exchange rate system
supply and demand set the exchange rates.
The common monetary policy for the euro zone is now formulated by
the European Central Bank.
The largest and most active financial market in the world is
the FX market.
Under the Bretton Woods system,
the U.S. dollar was the only currency that was fully convertible to gold; other currencies were not directly convertible to gold.
Comparing the U.S. with the German and Japanese corporate governance systems,
the U.S. system is "market-centered." the German and Japanese systems are "bank centered." it seems fair to say that no country has a perfect system.
The Sarbanes-Oxley Act of 2002 stipulates that
the company should appoint independent financial experts to its audit committee. both CEO and CFO sign off on the company's financial statements. a public accounting oversight board be created.
In many countries with concentrated ownership
the conflicts of interest are greater between large controlling shareholders and small outside shareholders than between managers and shareholders.
The value of private benefits of control may be measured using
the difference in value between non-voting shares and voting shares or "block premium," the difference between the price per share paid for a control block of shares versus the exchange price of regular shares.
The SF/$ spot exchange rate is SF1.25/$ and the 180-day forward exchange rate is SF1.30/$. The forward premium (discount) on annualized basis is
the dollar trading at an 8% premium to the Swiss franc, The formula for calculating the forward premium/discount is [(F(SF/j) - S(SF/j)) / S(SF/j)] × 360/days. Plugging into that formula, you should get the following: (1.30 - 1.25) / 1.25 = 0.04 × (360/180) = 0.08.
Even though compliance with the Cadbury Code of Best Practice is voluntary,
the job security of U.K. chief executives has become more sensitive to the company performance, strengthening managerial accountability and weakening its entrenchment. the Cadbury Code has made a significant impact on the internal governance mechanisms of U.K. companies. joint CEO/COB (chief executive officer and chairman of the board) positions declined.
Generally speaking, a country would be more prone to asymmetric shocks
the less diversified and more trade-dependent its economy is.
The genius of public corporations stems from their capacity to allow efficient sharing or spreading of risk among many investors, who can buy and sell their ownership shares on liquid stock exchanges and let professional managers run the company on behalf of shareholders. This risk sharing stems from
the limited liability of shareholders.
The price-specie-flow mechanism will work only if governments are willing to play by the rules of the game by letting the money stock rise and fall as gold flows in and out. Once the government demonetizes (neutralizes) gold, the mechanism will break down. In addition, the effectiveness of the mechanism depends on
the price elasticity of the demand for imports.
Indirect exchange rate quotations from the U.S. perspective are
the price of one U.S. dollar in the foreign currency.
Exchange Rate Mechanism (ERM) is
the procedure by which ERM member countries collectively manage their exchange rates and is based on a "parity-grid" system, which is a system of par values among ERM countries.
According to the theory of optimum currency areas,
the relevant criterion for identifying and designing a common currency zone is the degree of factor (i.e., capital and labor) mobility within the zone.
When individual investors become aware of overseas investment opportunities and are willing to diversify their portfolios internationally,
they benefit from an expanded opportunity set.
When managerial self-dealings are excessive and left unchecked,
they can have serious negative effects on share values. they can impede the proper functions of capital markets. they can impede such measures as GDP growth.
Unless investors can derive significant private benefits of control,
they will not pay substantial premiums for voting shares over nonvoting shares.
The board of directors may grant stock options to managers
to align the interest of managers with that of shareholders.
The European Monetary System (EMS) has the chief objective(s)
to coordinate exchange rate policies vis-à-vis the non-EMS currencies. to establish a "zone of monetary stability" in Europe. to pave the way for the eventual European monetary union.
The Asian Currency Crisis
turned out to be far more serious than the Mexican peso crisis in terms of the extent of contagion.
In the United Kingdom, the majority of public companies
voluntarily abide by the Code of Best Practice on corporate governance.
The Triffin paradox
was indeed responsible for the eventual collapse of the dollar-based gold-exchange system in the early 1970s. warned that the gold-exchange system of the Bretton Woods agreement was programmed to collapse in the long run. was first proposed by Professor Robert Triffin
During the 1990s there
were three major currency crises.
A conventional peg refers to.
when a country formally pegs its currency at a fixed rate to another currency or basket of currencies where the basket reflects the geographic distribution of trade, services, or capital flows
A crawl-like arrangement refers to:
where the exchange rate remains within a narrow margin of 2 percent relative to a statistically identified trend for six months or more, and the exchange rate arrangement cannot be considered as floating
Suppose you observe the following exchange rates: €1 = $1.25 and £1 = $2.00. Calculate the euro-pound cross-rate.
£1 = €1.60, S(€/£) = S($/£) / S($/€) = ($2/£1) / (€1/$1.25), or ($2/£1) × ($1.25/€1) = €1.60/£
Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.
¥192/¥€1.00, S(€/¥) = S($/¥) / S($/€) = ($1/¥120) / ($1.60/€1), or ($1/¥120) − (€1/$1.60) = ¥192
What is the BID cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will pay in euros to buy Swiss francs.
€0.5386/CHF, 0.7648CHF /€ 1.42 = €0.5386/CHF
What is the BID cross-exchange rate for Canadian dollars priced in euro? Hint: Find the price that a currency dealer will pay in euros to buy Canadian dollars.
€0.6094/CAD, CAD0.8653 / €1.42 = €0.6094/CAD
What is the ASK cross-exchange rate for Canadian dollars priced in euro? Hint: Find the price that a currency dealer will take in euros to sell Canadian dollars.
€0.6191/CAD, CAD0.8667 /€ 1.4 = €0.6191/CAD
If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding €/$ bid and ask prices are
€0.6623 and €0.6667., €0.6623 = 1/$1.51 and €0.6667 = 1/$1.50
Suppose you observe the following exchange rates: €1 = $1.50 and ¥120 = $1.00. Calculate the euro-yen cross-rate.
€1 = ¥180, S(€/¥) = S($/¥) / S($/€) = ($1/¥120) / ($1.50/€1), or ($1/¥120) × (€1/$1.50) = €180/¥
Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S. perspective is
€1.00 = $1.25., $1/€0.8 = $1.25
Using the table shown, what is the spot cross-exchange rate between pounds and euro on Tuesday?
€1.00 = £0.75, S(£/€) = S($/€) / S($/£), or S(£/€) = €1.5/£2 = £0.75/€.
Suppose you observe the following exchange rates: €1 = $1.45 and £1 = $1.90. Calculate the euro-pound cross-rate.
€1.3103 = £1.00, S(€/£) = S($/£) / S($/€) = ($1.90/£1) / ($1.45/€1), or ($1.90/£1) × (€1/$1.45) = €1.3103
Suppose you observe the following exchange rates: €1 = $1.50 and £1 = $2.00. Calculate the euro-pound cross-rate.
€1.3333 = £1.00, S(€/£) = S($/£) / S($/€) = ($2/£1) / ($1.50/€1), or ($2/£1) × (€1/$1.50) = €1.3333
Using the table above, what is the bid price of pounds in terms of euro?
€1.3371/£, ($1.9712/£) / ($1.4742/£) = €1.3371/£. Alternatively, ($1.9712/£) x (€0.6783/$) = €1.3371/£.
