Global Business Final Exam

Assume that the exchange rate between the euro and the dollar is € 1 = $1.20. A camera that retails for $300 in New York sells for € 200 in Berlin. Ignoring any transaction costs or barriers, this represents an initial arbitrage profit potential of:

$60 € 200 = $240 (€ 200 x 1.2). The difference of $60 ($300-$240) is the profit

Why has FDI increased?

- Firms still fear protectionist policies - The shift toward democratic political institutions and free market economies encourages FDI - Globalization is prompting firms to ensure they have a significant presence in many regions of the world

FDI: Flow Stock

- amount of FDI over a period of time (usually one year) - accumulated value of foreign owned assets at a given point in time

Licensing - definition

- occurs when a firm (the licensor) licenses the right to produce its product, use its production processes, or use its brand name or trademark to another firm (the licensee). In return for giving the licensee the rights, the licensor collects a royalty fee on every unit the licensee sells

According to internalization theory, licensing has three major drawbacks as a strategy for exploiting foreign market opportunities. What are they?

1. May result in a firm's giving away valuable technological know-how to a potential foreign competitor 2. Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability 3. Such capabilities are often not amenable to licensing

A firm has full outright stake in an acquisition when it acquires

100 percent

You exchanged $1,000 to 105,000 yen for a trip to Japan. During your stay, you spent 50,000 yen. Also, during this period the dollar weakened against the yen to 100 to a dollar. On your return, you went to the bank to exchange the remaining yen. How many dollars did you spend on the trip?

450 The remaining 55,000 yen would yield 550 dollars when the exchange rate is 100 yens for a dollar ($1,000 - $550).

Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is $1 = $100 Yen and that the yen/dollar exchange rate quoted in New York at the same time is $1 = 120. Which profit making situation exists here?

Arbitrage

Which of the following refers to the purchase of securities in one market for immediate resale in another to profit from a price discrepancy?

Arbitrage

What is a Pegged float ?

Exists when the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate Typically, a country will "peg" its currency to a major currency such as the U.S. dollar, or to a basket of currencies.

One of the factors that contributed to the Mexican crisis was that the central bank began converting short term debt, denominated in pesos, into dollar- denominated bonds. This conversion resulted in an increase in foreign reserves and a decrease in debt.

False

T/F: The European Community was established by the Maastricht Treaty

False

The Bretton Woods agreement legalized the use of devaluation as a tool of competitive trade policy.

False

The Central bank is similar to a Currency board and both act as banks of last resort

False

The central bank is government owned and not separate from the country's finance ministry

False

Was FDI governed by the GATT until the 1990s? `

False, 1995

Economic union as a level of economic integration is the most integrated? True or false?

False, political union is the most integrated

When the foreign exchange market determines the relative value of a currency, the country is said to adhere to a _____ exchange rate regime.

Floating

Identify the correct sequence of economic integration starting from the least integrated to the most integrated.

Free trade area, a customs union, a common market, an economic union, and, finally, a full political union.

Which of the following is a possible adverse effect of FDI on a host country's balance-of-payments position? - A foreign subsidiary exports a substantial number of its outputs abroad. - A foreign subsidiary gets a substantial number of its inputs from the host country. - Increased competition in the domestic markets. - Subsequent outflow of earnings from the foreign subsidiary to its parent company.

Subsequent outflow of earnings from the foreign subsidiary to its parent company.

Which of the following is transacted when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk?

Swap

As a manager what does it tell you when a country has a currency board?

That it is a developing nation

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following reflects the foreign exchange dealers' expectations about the dollar over the next 30 days?

The dollar will appreciate against the euro.

How are contributions to the IMF determined.

The largeness of the country

Which of the following is a key feature of the foreign exchange market? The market never sleeps. The market is located in London. The market is characterized by high transaction costs. The market is shut for only three hours.

The market never sleeps.

How are voting rights within the IMF determined.?

The quota, which is based broadly on its relative position in the world economy

Which of the following is a major reason why governments limit convertibility of their currency

To preserve their foreign exchange reserves

In 2002-2007, the euro rose in value against the dollar. This boosted the dollar profits of American multinationals with significant operations in Europe. Which of the following is this an example of?

Translation exposure

A dirty float is called so because the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency.

True

A fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation.

True

A floating exchange rate is a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the law of supply and demand

True

After joining the European Union in 2004 Latvia established a currency board system which pegged the value of its currency to the euro. This system came under significant pressure when the effects of the financial crisis that began in the United States in 2008 spilled over into the country

True

If the IMF agrees that the country's balance of payments is in "fundamental disequilibrium," the system of adjustable parities allows for the devaluation of a country's currency by more than 10 percent.

True

It is further assumed that keeping the price of labor down will be an incentive for increasing employment and production. Is this true.

True

One criticism of the IMF is that its traditional policy prescriptions represent "one-size-fits-all" approach to macroeconomic policy that is inappropriate for many countries. .

True

Pegged exchange rates are popular among many of the world's smaller nations. Is this true?

True

Since the Bretton Woods system of floating exchange rates collapsed in 1973, the world has operated with a mixed system in which some currencies are allowed to float freely, but many are either managed by government intervention or pegged to another currency.

True

T/F: The treaty of Maastricht committed EC members to adopting a common currency by January 1, 1999?

True

The IMF assumes that the combination of increased interest rates and Cutbacks in government spending will shift resources from domestic consumption to private investment. Is this true.

True

True or False: Trade creation occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. It may also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area

True

Under the Bretton Woods agreement, all countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold. Is this true or false?

True

Under the free market view, countries should specialize in the production of those goods and services that they can produce most efficiently.

True

Does the IMF take a longer run perspective?

True????

Bolivia, Chile, Ecuador, Colombia, and Peru signed an agreement in 1969 to create the

Andean Pact

In the case of Korea's financial collapse in the crisis of 1997 many blamed the country's Chaebol (large industrial conglomerates like Samsung and Hyundai etc.) that had built up massive debts as they invested in new factories. Is this true? What is a Chaebol?

????? large business conglomerate, typically family-owned one.

A _____ is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

A currency Swap

Two types of FDI

Acquisitions/ Mergers, and greenfield investments,

Exporting - Advantages and disadvantages

Advantage: - It need not bear the ignorance costs associated with FDI, and it can reduce the risks associated with selling abroad by using a native sales agent Disadvantage: - Transportation costs (low value-to-weight ratio products can be produced in almost any location) - Trade barriers, EX: import tariffs, trade quotas - Problems with local agents

Acquisitions/ Mergers - advantages and disadvantages

Advantages - quicker to execute than greenfield invests - easier and less risky for a firm to acquire desired assets than build them from the ground up - firms believe they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills Disadvantage: - There are fewer target firms to acquire in developing nations

What is a Free Float ?

An exchange rate policy where the exchange rate is determined completely by market forces?

In 1944 after World war II , heads of several countries met at the conference and established the basic framework for what?

Bretton Woods Conference

How are spot exchange rates in the foreign exchange markets determined?

By the relative demand and supply for different currencies

_____ refers to a range of barter-like agreements by which goods and services can be traded for other goods and services.

Countertrade

What is a Fixed exchange rate system?

Countries fix their currencies against each other at a mutually agreed upon value - Prior to the introduction of the euro, some European union countries operated with fixed exchange rates within the context of the European Monetary System (EMS)

This account in the balance of payments, records transactions involving the export and import of goods and services.

Current account

. The IMF assumes that the combination of increased interest rates and ________ ______ ________ ________ will shift resources from domestic consumption to private investment. It is further assumed that keeping the price of local labor down will be an incentive for increasing employment and production. a steady government spending

Cutbacks in government spending

A U.S. company that imports laptop computers from Japan knows that in 30 days it must pay yen to a Japanese supplier when a shipment arrives. The company will pay the Japanese supplier ×150,000 for each computer, and the current dollar/yen spot exchange rate is $1 = ×110. The importer knows she can sell the computers the day they arrive for $1,600 each. However, the importer will not have the funds to pay the Japanese supplier until the computers have been sold. The importer enters into a 30-day forward exchange transaction with a foreign exchange dealer at $1 = ×105. Which of the following will happen if the exchange rate after 30 days is $1 = ×90?

D. The importer will incur a loss of $67 per computer.

What currency was convertible to gold after the Bretton Woods agreement?

Dollar

The rapid rise in the value of the dollar on the foreign exchange market in the 1990s hurt the price competitiveness of many U.S. producers in world markets. U.S. manufacturers that relied heavily on exports saw their export volume and world market share decline. This is an example of:

Economic Exposure

The voting rights within the IMF are roughly proportionate to the___________ _________made by member nations. The US has 17% of the vote followed by Japan and Germany. US, Japan and Europe together account for more than 80% of the vote in the IMF. The breakdown of the democratic process becomes clear as the Jamaican people are removed from participation in the decisions that truly affect their lives.

Economic contributions

Why was the International Monetary Fund (IMF) created?

Established "to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment, and to provide temporary financial assistance to countries to help ease balance of payments adjustment.

A free trade zone is a:

Geographical area in which commerce can be conducted without tariffs being applied

Which of the following occurs when the quantity of money in circulation rises faster than the stock of goods and services?

Inflation

Which of the following refers to the institutional arrangements countries adopt to govern exchange rates? read carefully!

International monetary system

In the 1960s, RCA licensed its leading-edge color television technology to a number of Japanese companies, which later took over the market. This demonstrates

Licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor.

Which is the most important foreign exchange trading center in terms of percentage of activity?

London

The viability of an exporting strategy is often constrained by transportation costs, particularly of products (as we saw in the case example on Cemex) that have a _____ and that can be produced in almost any location.

Low value to weight ratio

The principle argument of those who opposed NAFTA centered on the fear that ratification would result in:

Mass exodus of jobs from the US into Mexico

Can a country with a currency board issue additional domestic notes and coins even if there are no foreign reserves in the country to back it?

No

A French company has 20 million euros it wants to invest for three months. Investing in a Thai money market account gives the company a higher return than domestic investments. Is this investment risk-free? Why or why not?

No, because foreign currency movements in the intervening period can affect the profitability.

What is FDI?

Occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country. "interest of 10% or more in foreign business entity" becomes a multinational enterprise

To encourage inward FDI, it is increasingly common for governments to:

Offer tax concessions to firms that invest in their countries

An industry composed of a limited number of large firms (i.e. an industry in which four firms control 80 percent of a domestic market) is referred to as a(n):

Oligopoly

In 1990, the MERCOSUR pact was expanded to include:

Paraguay and Uruguay

Greenfield Investments -advantages and disadvantages

Pro: - Gives the firm a much greater ability to build the kind of subsidiary company that it want Cons: - Slower to establish -Risky - Possibility of being too late where other companies have a good presence, which leaves no room for greenfield investments

Subsidiaries -advantages and disadvantages

Pros: - Protection of technology/ knowledge -Allows for tight control and strategic coordination Cons: - High costs and risks

The World Bank takes a longer run perspective. It aims for better governments which means trying to transform a borrower nation's economy into a free- market economy. It typically proposes market deregulation, sometimes accompanied by new lending from the World Bank and private lenders. These policies are supposed to benefit Third World economies by integrating them into the global market. Do you agree?

What actually happens is that Third World people suffer, while commercial banks in the North collect a great deal of interest. In Jamaica, only 5 percent of total money borrowed since 1977 has been able to stay inside the country.

A commercial bank offers funds to clients on a first come, first serve basis. If the commercial bank does not have enough liquidity to meet its clients' demands can it turn to the central bank to borrow additional funds? Can central banks favor any particular commercial bank?

Yes to both

Does Hong Kong have a currency board?

Yes, Hong Kong Monetary Authority

China's early insistence for many years on pegging their currency to the dollar has created great consternation/concern for the US and other countries. Is this true according to your text?

Yes, true

Subsidiaries - definition

a company owned by a parent company

A critical competitive feature of oligopolistic industries is interdependence of the major players: What one firm does can have ______________

an immediate impact on the major competitors, forcing a response in kind.

The theory of purchasing power parity (PPP) links changes in the exchange rate between two countries' currencies to:

changes in the countries' price levels.

A(n) _____ has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members.

common market

Currency carry trade takes advantage of:

differences in interest rates between countries

A currency is said to be _____ when only nonresidents may convert it into a foreign currency without any limitations.

externally convertible

Walmarts move into Japan is considered to be

horizontal FDI

FDI is not the investment by

individuals, firms or public bodies in foreign financial investments

8. A critical competitive feature of oligopolistic industries is the _____ of the major players

interdependence

The free market view argues that

international production should be distributed among countries according to the theory of comparative advantage. Countries should specialize in the production of those goods and services that they can produce most efficiently

According to internalization theory, licensing has three major drawbacks as a strategy for exploiting foreign market opportunities. Each of the following is a drawback of licensing except: - Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. - Licensing helps a firm avoid making a direct foreign investment in a foreign country. - Licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor. - When a firm's competitive advantage is based not so much on its products as on the management, marketing, and manufacturing capabilities that produce those produces, licensing fails to capture those advantages

licensing helps a firm avoid making a direct foreign investment in a foreign country.

Exporting - definition

sale of products produced in one country to residents of another county

. A regional free trade agreement will benefit the world only if:

the amount of trade it creates exceeds the amount it diverts

Greenfield Investments -definition

the establishment of a new operation in a foreign country

What is the role of the central bank? Are they responsible for overseeing the monetary system for a nation (or group of nations), along with a wide range of other responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment?

they responsible for overseeing the monetary system for a nation (or group of nations), along with a wide range of other responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment?

The basic objective of the Association of Southeast Asian Nations is to

to foster freer trade among member countries and to achieve cooperation in their industrial policies