International Finance

Balance of payments

-is defined as the statistical record of a country's international transactions over a certain period of time presented in the form of a double-entry bookkeeping. -provides detailed information concerning the demand and supply of a country's currency. -can be used to evaluate the performance of a country in international economic competition. -all of the options(C)

The table below shows the bushels of wheat and the bottles of beer that North and South Dakota can produce per day of labor under two different hypothetical situations (Cases I and II). Case ICase II South DakotaNorth DakotaSouth DakotaNorth DakotaWheat (bushels)4131Beer (bottles)1242 Which state has a comparative advantage in wheat production in Case I?

South Dakota

The table below shows the bushels of wheat and the bottles of beer that North and South Dakota can produce per day of labor under two different hypothetical situations (Cases I and II). Case ICase II South DakotaNorth DakotaSouth DakotaNorth DakotaWheat (bushels)4131Beer (bottles)1242 Which state has a comparative advantage in wheat production in Case II?

South Dakota

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.

**Current Account

export and imports of goods and services 1. exports and imports of tangle goods (oil clothes, cars, computers) 2. Services- legal, cosulting, engineering 3. primary income: dividends, interest, and other foreign investments 4. secondary income: one directional flows- foreigner aid, grants, gifts

International reserve assets include "foreign exchanges". These are

foreign currencies held by a country's central bank.

**Multinational Corporation (MNC)

from that has been incorporated in one country and had production and sales in other countries =60,000 MNCS

*Bimetallism

god and silver used as money

A country that gives foreign aid to another country can be viewed as

importing goodwill from the latter.

A multinational firm can be defined as a firm that

incorporated in one country and has production and sales operations in several other countries.

The spot market

involves the almost-immediate purchase or sale of foreign exchange.

The bid price

is the price that a dealer stands ready to pay.

***Greshams Law

least valuable metal will circulate the most "Bad money (over valued = silver) drives "good money" (undervalued=Gold) out of circulation

In David Ricardo's theory of comparative advantage,

liberalization of international trade will enhance the welfare of the world's citizens.

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.

**Captial account

natural resources, mineral rights, airspace

The foreign exchange market closes

never

The balance of payments

not only international trade (exports and imports) but also cross-border investments.

*Opportunity cost

of making one additional unit of goof can be defined as the value of some other good that you have to give up in order to produced additional units

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.

When individual investors become aware of overseas investment opportunities and are willing to diversify their portfolios internationally,

they benefit from an expanded opportunity set.

**Quantity theory of Money

value of money is based on amount of money in economy -when money supply increases, value of money falls and price increases

When Honda, a Japanese auto maker, built a factory in Ohio

It was engaged in foreign direct investment

In 2012, the United States had a current account deficit. The current account deficit implies that the United States

consumed more than it produced.

Since the balance of payments is presented as a system of double-entry bookkeeping,

every credit in the account is balanced by a matching debit and every debit in the account is balanced by a matching credit.

Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of value is an example of

exchange rate risk

Currently, international reserve assets are comprised of

gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF).

*Political Risk

government has right to regulate movement of good, capital, and people across boarders -1992 Enron

*Interwar Period:

"predatory' deprecation was used as a means of gaining advantage in world export market

+deprecation

$ depreciates again E Currency depreciates---> imports become more expensive ---> will buy less of foreign goods LOOK AT CH,2 PG 3 FOR EX.

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

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

Under the Bretton Woods system each country established a par value for its currency in relation to the dollar. And the U.S. dollar was pegged to gold at

$35 per ounce.

The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: (i) Bimetallism (ii) Bretton Woods system (iii) Classical gold standard (iv) Flexible exchange rate regime (v) Interwar period The chronological order that they actually occurred is:

(i), (iii), (v), (ii), and (iv)

The monetary system of bimetallism is unstable. Due to the fluctuation of the commercial value of the metals,

**the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law).

The statistical discrepancy in the balance-of-payments accounts

-arise since recordings of payments and receipts are done at different times, in different places, possibly using different methods. -arise because some transactions (illegal transactions) occur "off the books." -represents omitted and misreported transactions. -all of the options(C)

Statistical discrepancy, which, by definition, represents errors and omissions,

-cannot be calculated directly. -is calculated by taking into account the balance-of-payments identity. -probably has some elements that are honest mistakes, it can't all be money laundering and drugs. -all of the options (C)

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

-currency futures and options, foreign stock index futures and options. -multicurrency bonds. -international mutual funds, country funds, exchange traded funds. -all of the options (c)

An "international" gold standard can be said to exist when

-gold alone is assured of unrestricted coinage. -there is two-way convertibility between gold and national currencies at stable ratios. -gold may be freely exported or imported. -all of the options (C)

**International efforts to promote free trade

GATT( general agreement on tariffs and trade) 1947 NAFTA (North America free trade agreement) 1994

The standard size foreign exchange transactions are for

$10 million USD.

The international monetary system can be defined as the institutional framework within which

-international payments are made. -movement of capital is accommodated. -exchange rates among currencies are determined. -all of the options (C)

The current account includes

the export and import of goods and services

Generally speaking, any transaction that results in a receipt from foreigners

will be recorded as a credit, with a positive sign, in the U.S. balance of payments.

Generally speaking, any transaction that results in a payment to foreigners

will be recorded as a debit, with a negative sign, in the U.S. balance of payments.

If you can make a good product at a low opportunity cost,

you would be well served to produce that good and trade for other goods.

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

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= $2

**BOP

1. Detailed info on supply and demand of country's currency 2. Signal to potential country's as a business partner fir rest of world 3. evaluate the performance of country in international economic competition

*what makes international finance special?

1. Foreign exchange 2. Political Risk 3. Market Imperfections 4.Expanded Opportunity set

Classical Gold Standard

1. gold alone was assured of unrestricted coinage 2. 2-way convertibility between gold and national currencies at a stable ratio 3. gold can be freely imported and exported *Exchange rate of two countries currencies are determined by their relative gold contents

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 "big figure," assumed to be known to all traders is __________.

1.25

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

Bretton Woods System

1944 meeting took place in Bretton Woods -Interna. monetary fund (IMF) -World Bank

Flexible Exchange Rates

1973- present

When the balance-of-payments accounts are recorded correctly, the combined balance of the current account, the capital account, the financial account, and the reserves account must be zero and are illustrated by the equation:

BCA + BKA + BFA + BRA = 0

Under the fixed exchange rate regime, the combined balance on the current accounts will be equal in size, but opposite in sign and are illustrated by the equation:

BCA + BKA + BFA = −BRA

Under the pure flexible exchange rate regime, a current account surplus or deficit (assuming the capital account is negligible) must be matched by a financial account deficit or surplus, and vice versa. this is illustrated by the equation

BCA + BKA = −BFA

**Cost and benefits of monetary union European Central Bank (ECB)

Benefits: reduced transaction costs and elimination of exchange rate uncertainly Costs- loss if national monetary and exchange rate policy independence

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. Which of the following statements is true?

Country A is relatively more efficient than Country B in the production of textiles.

**BOP

Credits(+)- positive sign in U.S BOP when we receive from foreigners eg: sales of US. goods, services, financial claims. real assets Debits: (-) with negative sign when we make payments to foreigner eg: u.s purchases goods, services, financial claims, real assets

The doctrine of comparative advantage was first put forth by

David Ricardo.

**Expanded Opportunity Set

Firms can locate production in any country or region of the world to move their performance and raise capital where the cost of capital is lower

Jamaica Agreement

Flexible exchange rates were declared acceptable and central banks were allowed to intervene in exchange rate markets to iron out any unwanted volatilities.

The world's largest foreign exchange trading center is

London

The table below shows the bushels of wheat and the bottles of beer that North and South Dakota can produce per day of labor under two different hypothetical situations (Cases I and II). Case I Case II South Dakota North Dakota South Dakota North Dakota Wheat(bushels) SD4 1. SD3. 1 Beer (bottles) SD1. 2. SD4 2

North Dakota

Under the gold standard, international imbalances of payment will be corrected automatically under the

Price-specie-flow mechanism.

If the United States imports more than it exports, one possible outcome is the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris parius.

True.

Which of the following would not count as a foreign exchange reserve held by a central bank?

The local currency

In November 2018, three member countries of NAFTA signed a new accord called the

Us-Mexico-Canada-Agreement

The core of the Bretton Woods system was the

World Bank.

Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Compute the opportunity cost of producing one additional unit of food instead of textiles.

a 1.67 yards of textiles per pound of food

The United States is considered

a net debtor nation.

The official reserve account includes

all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

**Market Imperfections

any frictions that keep the market from functioning smoothly -Nestle (foreigners only allowed to buy bears shares)

**Price Specie Flow Mechanism

any misalignment of exchange rates and international imbalances of payment were automatically corrected -highly stable environment of International trade and investment Ex: LOOK IN NOTES CH,2 PG. 3

Nestlé, a well-known Swiss corporation,

at one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, there was a major transfer of wealth from foreign shareholders to domestic shareholders.

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

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.

A country's international transactions can be grouped into the following three main types:

current account, capital account, financial account and official reserve account.

The financial account may be divided into three categories—

direct investment, portfolio investment, and other investment.

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

*Foreign exchange risk

risk that foreign currency profits may evaporate in dollar terms due to unanticipated, unfavorable, exchange rate movements

When a country must make a net payment to foreigners because of a balance-of-payments deficit, the central bank of the country

should either run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs) or borrow anew from foreign central banks.

During the period of the classical gold standard (1875-1914) there were

stable exchange rates.

**Balance of Payments

statistical record of a country's international transactions over a certain period. of time presented in form of double entry bookkeeping

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. this type of imbalance will not be able to persist indefinitely. net export from Britain will be accompanied by a net flow of gold in the opposite direction. all of the options C)

Under a purely flexible exchange rate system

supply and demand set the exchange rates.

The central bank of the United States is

the Federal Reserve System.

Under a flexible exchange rate regime, governments can retain monetary policy independence because the external balance will be achieved by

the exchange rate adjustments.

**After Nestle lifted restriction

the two prices diverged Transfer:of wealth from foreign share holders to domestic shareholders

When the balance-of-payments accounts are recorded correctly, the combined balance of the current account, the capital account, the financial account and the reserves account must be

zero

Suppose that the current exchange rate is £1.00 = $2.00. The indirect quote, from the U.S. perspective is

£0.50 = $1.00.

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.

Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S. perspective is

€1.00 = $1.25.