MGF Chapter 18

if the japanese yen is less expensive in the forward market than it is today, it said to be selling at a

discount

interest rate parity does what

eliminates covered interest arbitrage opportunities

money deposited in a financial center outside the country who's currency is involved is called

eurocurrency

T/F political risk refers only to problems for U.S companies caused by foreign governments

false

an interest rate swap involves swapping a _____ payment for a _____ payment

fixed rate; floating rate floating rate; fixed rate

the use of _____ exchange agreements can help reduce the short term expose to change rate risk

forward

if an international firm borrows money in the foreign country where it has operations it can reduce

long run exchange rate exposure

unanticipated changed in relative economic conditions that affect the value of a foreign operation are known as _________

long term exposure to exchange rate risk

the concept that exchange rates adjust to keep purchasing power constant month currencies is referred to as

purchasing power parity

the use of local financing from the government of the foreign country where the operation is located can...

reduce politcal risk

an agreement to trade currencies within two business days at todays exchange rate is called

spot trade

when it is reported that the dollar is stronger in the foreign exchange market it means that

the dollar is more valuable and can buy more of other currencies

conditions that must be present for absolute purchasing power to exist include which of the following (2)

there must be no trade barriers the goods must be identical

when a U.S company calculates its accounting net income, it must report all income, including income from foreign operations, in dollars. This leads to ______ exposure to exchange rate risk

translation

users of the foreign exchange market include (3)

importers who pay for goods using foreign currencies speculators who try to profit from changes in exchange rates foreign exchange brokers who match buy and sell orders

what is true concerning triangle arbitrage (2)

it helps keep the currency market in equilibrium it is a profitable situation involving 3 separate currency exchange transactions

what are some strategies for hedging long term exchange rate risk

matching foreign currency inflows and outflows

the foreign exchange market is where

one countries currency is traded for another country currency

a foreign bond refers to a bond

that is issued in a single country, denominated in the currency of that country

cross rate between two foreign currencies is usually quoted in what currency

the US Dollar

T/F if purchasing power parity did not hold, it would be possible to engage in arbitrage simply by transporting products to other countries

true

why is it more challenging to manage long term exchange rate risk exposure than to hedge short term risks

organized forward markets do not exist for long term needs of corporations

Relative PPP implies that the change in an exchange rate is driven by the difference in the _______ of the two countries involved

inflation rates

what is true when describing purchasing power parity (3)

major factor in the rate of change in exchange rates parity is expressed as both absolute and relative exchange rates adjust to keep purchasing level between currencies

the different types of exchange rate risk include (3)

long/short term exposure translation exposure

a security issued in the US representing shares of foreign stock is called

ADR ( American depository receipt)

gilts are securities issued by the ______

British and Irish governments

an agreement to exchange currencies at a future point in time at an exchange rate that is agreed upon today is called

a forward trade

what refers to a firm with a large portion of its business outside of its parent country

a multinational an international corporation

the condition that a commodity costs the same regardless of the currency used or where it is purchased is called

absolute purchasing power parity

protecting oneself from a change in the exchange rate by locking in the forward exchange rate today is called

covered interest arbitrage