International Business Exam 4

Assume that the current exchange rate is €1= $1.50. If you exchange €1000 for dollars you will receive _____.

$1500 (1000x1.5)

What is a con of a fixed exchange rate?

-any pressure on the dollar could ruin the system

What are the three types a financial crisises?

-currency crisis -banking crisis -foreign debt crisis

Why are financial services becoming less regulated?

-development of Eurocurrency -pressure from financial service companies -increasing acceptance of the free-market ideology associated with an individualistic political philosophy

What are the cons of pegged exchange rates?

-excessive private sector debt -expanding current account trade deficits

What did the Jamaica agreement decide?

-floating rates are acceptable -gold was abandoned as a reserve asset -The total annual IMF quotas (the amount member countries contribute to the IMF) were increased to $41 billion

What are the cons of the euro currency market?

-if the bank fails depositors have a higher risk of losing money -borrowing international funds can expose a company to foreign exchange risk

What are the pros of a pegged exchange rate

-imposes monetary discipline on a country -leads to low inflation

Who are the main players in the capital markets?

-investors (individual, company, institution) -market makers (commercial/investment bankers) -borrowers (individual, company, gov)

What are the benefits of the euro currency market?

-lack of government regulation -can offer higher interest rates (good if you want to deposit cash) -can offer lower interest rates (good if you want to borrow)

What are the pros of floating exchange rate?

-monetary Policy Autonomy -automatic Trade Balance Adjustments -help country deal with economic crisises

What are global capital market risks?

-nations are becoming more vulnerable to speculative capital flow -lack of "patient money" (supports long term cross border capital flow) -lack of quality info

What are the pros of a fixed exchange rate?

-puts the brake on competitive devaluations -brings stability to the world trade environment -imposes monetary discipline on countries, thereby curtailing price inflation

What are the functions of the foreign exchange market?

1. Currency conversion 2. Provide insurance against foreign exchange risk

What are the three types of foreign exchange risk?

1. spot exchange rates 2. forward exchange rates 3. currency swaps

An equity loan is made when:

A corporation sells stock to investors

_____ requires a corporation to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making

A debt loan

What is a banking crisis?

A loss of confidence in the baking system that leads to a run on banks, as individuals and companies with drawl their deposits

What is an inefficient market?

A market in which prices do not reflect all available information

What is portfolio risk?

A portfolio with many investments, each of those investments carries it's own risk, and all of these risks combined expose your portfolio

What is countertrade?

A range of barter like agreements by which goods and services can be traded for other goods and services

What is a foreign debt crisis?

A situation in which a country cannot service it's foreign debt obligations, whether private sector or government debt

What is a currency crisis?

A speculative attack on the exchange value of a currency results in a sharp depreciation the value of the currency or forces authorities to expand large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate

What is a forward contract?

An informal agreement traded through a broker-dealer network to buy and sell specified assets, typically currency, at a specified price at a certain future date

What is a euro currency market?

Any currency banked outside it's country of origin

What is the Brenton Woods agreement?

At the height of World War II, representatives from 44 countries established two multi national institutions the IMF and World Bank

Which of the following occurs when trader start moving as they heard in the same direction at the same time?

Bandwagon effect

What is carry trade?

Borrowing in one currency where interest rates are low and then using the proceeds to invest in another country where interest rates are high

How can managers hedge against currency fluctuations?

By maintaining strategic flexibility by dispersing production to different locations around the globe

Which of the following would a follower of the inefficient market school of thought agree with?

Companies would be better off investing in foreign exchange forecasting services

What is the currency board system?

Converts domestic currency on-demand into another currency at a fixed exchange rate

What can adverse movements in foreign exchange rates substantially increase?

Cost of foreign currency loans

What is a dirty float?

Countries that try to hold the value of their currency with in some range against an important reference country's currency such as the US dollar or basket of currencies

The Asian economic crisis and the global financial of 2008 2009 crisis were caused by _____.

Excessive debt

True or false? The cost of capital is the difference between cost of inputs and outputs

False

True or false? Using floating exchange rates will help countries reduce the risk of investing in foreign assets

False

What is the International Fisher effect?

For any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between countries

Borrowers can hedge against foreign exchange risks by entering into a _____ contract

Forward

Market makers are the financial service companies that connect investors and borrowers. Those who want to borrow money typically include:

Governments

Where have foreign debt crisises taken place?

Greece, Ireland, and Portugal in 2010

Which of the following is a common criticism against the International Monetary Fund?

IMF lacks any real mechanisms for accountability

Which country is an example of a banking crisis?

Iceland in 2008

What is the law of one price?

In competitive markets free of transportation cost and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency

_____ perform a direct connection function in capital markets

Investment banks

Which of the following is a reason why the global capital market is increasingly becoming speculative?

Investments in the global capital market are faced with a lack of quality information

The systematic risk of the stock market is the:

Level of non-diversifiable risk in an economy

The liquidity of the market is _____ in a purely domestic capital market

Limited

What does the IMF do?

Maintains order in the international monetary system

What is a con of floating exchange rate?

Market forces have produced a volatile dollar exchange rate

What does it mean for a currency to be externally convertible?

Only non-residents may convert it into a foreign currency without any limitations

When using the euro markets, companies:

Pay less for the loans

What is the gold standard?

Pegging currencies to gold and guaranteeing convertibility

What is a hedge fund?

Private investment funds that position themselves to make long bets on assets they think will increase in value and short bets on assets they think will decline in value

In the face of unpredictable movements in exchange rates, businesses should:

Pursue strategies that will reduce their economic exposure

What is capital flight?

Residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency

What is the Jamaica agreement?

Revise the IMF's articles of agreement to reflect the new reality of floating exchange rates

The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will:

See depreciation in it's currency exchange rate

What is currency speculation?

Short term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

Currency _____ typically involves the short term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

Speculation

What is good par value?

The amount of a currency needed to purchase one ounce of gold

What does it mean for a currency to be freely convertible?

The country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency within it

_____ is characterized by a lack of government regulation

The euro currency market

What is the balance of trade equilibrium?

The income of a country's residences earn from exports is equal to the money it's residents pay to other countries for import

What is the international monetary system?

The institutional arrangements that govern exchange rates

What is systematic risk?

The movements in a stock portfolio's value that are attributable to macro economic forces affecting all firms in an economy rather than factors specific to an individual firm

What is purchasing power parity theory?

The price of a basket of particular goods should be roughly equivalent in each country

What is the cost of capital?

The price of borrowing money

Inflation occurs when:

The quantity of money in circulation rises faster than the stock of goods and services

What is a spot exchange rate?

The rate at which a foreign exchange dealer converts one currency into another currency on a particular day

What is a pegged exchange rate?

The value of the currency is fixed relative to a reference currency, such as the US dollar, and then the exchange rate between that currency and other countries is determined by the reference currency exchange rate

What did the IMF do to help Brazil in 2002 when they went through a currency crisis?

They stabilized the value of the Brazilian currency on the foreign exchange market by lending it foreign currency

True or false? By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market

True

True or false? Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors

True

True or false? Financial services have historically been the most tightly regulated of all industries.

True

True or false? Financial services is an information intensive industry

True

True or false? Investors can reduce the level of risk by diversifying a portfolio internationally

True

True or false? The capital market brings together those who want to invest money in those who want to borrow money

True

True or false? The cost of recording, transferring, and processing information has doubled with the advancements in technology since 1964

True

True or false? The relatively low correlation between the movement of stock markets in different countries indicates that countries face different economic conditions

True

What is one foreign exchange risk?

Unpredictable movements in exchange rates can inject risk into foreign currency borrowing, making something initially inexpensive, expensive

What is a fixed exchange rate?

Values of a set of currencies are fixed against each other at some mutually agreed on exchange rate

What does it mean for a currency to be non-convertible?

When neither residence nor non-residents are allowed to convert it into a foreign currency

What is a floating exchange rate?

When the foreign exchange market determines the relative value of a currency

What is a forward exchange?

When two parties agree to exchange currency and execute the deal at some specific date in the future (usually 30, 90, or 120 days)

What is inflation?

a general increase in prices and fall in the purchasing value of money

What is a currency swap?

simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

What is a foreign bond?

sold in a foreign country and denominated in that country's currency