International Business Ch. #10
Freely convertible currency p. 311
A country's currency is said to be freely convertible when the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.
Nonconvertible currency p. 311
A currency is nonconvertible when neither residents nor nonresidents are allowed to convert it into a foreign currency.
Externally convertible currency p. 311
A currency is said to be eternally convertible when only nonresidents may convert it into a foreign currency without any limitations.
Currency swap p. 300
A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. Swaps are transacted between international businesses and their banks, between banks, and between government when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.
Forward exchange p. 299
A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.
Carry trade p. 298
A kind of speculation that has become more common in recent years is known as the carry trade. The carry trade involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high.
Lag strategy p. 314
A lag strategy involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate.
Lead strategy p. 314
A lead strategy involves attempting to collect foreign currency receivables (payment from customers) early when a foreign currency is expected to depreciate and paying foreign currency payables (to suppliers) before they are due when a currency is expected to appreciate.
Efficient market p. 303
An efficient market has no impediments to the free flow of goods and services, such as trade barriers
Exchange rate p. 297
An exchange rate is simply the rate at which one currency is converted into another
Inefficient market p. 310
An inefficient market is one in which prices do not reflect all available information. In an inefficient market, forward exchange rates will not be the best possible predictors of future spot exchange rates.
Arbitrage p. 302
Buying a currency low and selling it high
Capital flight p. 312
Capital flight is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation or when a country's economic prospects are shaky in other respects
Countertrade p. 312
Countertrade refers to a range of barter-like agreements by which goods and services can be rated for other goods and services.
Currency speculation p. 298
Currency speculation typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.
Economic exposure p. 313
Economic exposure is the extent to which a firm's future international earning power is affected by changes in exchange rates. Economic exposure is concerned with the long-run effect of changes in exchange rates on future prices, sales, rates, and costs.
Forward exchange rate p. 299
Exchange rates governing future transactions are referred to as forward exchange rates. For most major currencies, forward exchange rates are quoted 30 days, 90 days, and 180 days into the future.
Foreign Exchange Market p. 296
The foreign exchange market is a market for converting the currency of one country into that of another country
Foreign exchange risk p. 297
The foreign exchange market serves two main functions. The first is to convert the currency of one country into the currency of another. The second is to provide some insurance against foreign exchange risk, or the adverse consequences of unpredictable changes in exchange rates.
Low of one price p. 303
The law of one price states that in competitive markets free of transportation costs and barriers to trade (such as tariffs), identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.
Spot exchange rate p. 299
The spot exchange rate is the rate at which a foreign exchange dealer concerts one currency into another currency on a particular day.
Bandwagon effect p. 309
This triggered a classic Bandwagon effect with traders moving as a herd in the same direction at the same time
Transaction exposure p. 312
Transaction exposure is the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. Such exposure includes obligations for the purchase or sale go goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies.
Translation exposure p. 313
Translation exposure is the impact of currency exchange rate changes on the reported financial statements of a company. Translation exposure is concerned with the present measurement of past events.
Fisher effect p. 308
The Fisher effect states that a country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). More formally, i=r+I
International Fisher Effect (IFE) p. 308
The International Fisher effect (IFE) states that for any two countries, the spot exchange should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.
