Chapter 10 - int bus

freely convertible currency

A country's currency is freely convertible when the government of that country allows both residents and nonresidents to purchase unlimited amounts of foreign currency with the domestic currency.

nonconvertible currency

A currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency.

carry trade

A kind of speculation that involves borrowing in one currency where interst rates are low, and then using the proceeds to invest in another currency where interest rates are high.

efficient market

A market where prices reflect all available information.

international Fisher effect (IFE)

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

What is the name of the market in which the currency of one country is converted into currency of another country?

Foreign exchange market

capital flight

Converting domestic currency into foreign currency.

currency speculation

Involves short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates.

forward exchange rate

The exchange rate governing a forward exchange transaction.

The concept of carry trade involves borrowing money in one currency where interest rates are low and then using the proceeds to invest in other currency where interest rates are high.

True

exchange rate

The rate at which one currency is converted into another.

Which of the following is the most important vehicle currency by trade volume?

U.S. Dollar

The inefficient market school argues that investing in exchange rate forecasting services would be a waste of money.

True

The risk that arises from volatile changes in exchange rates is commonly referred to as

foreign exchange risk.

foreign exchange market

A market for converting the currency of one country into that of another country.

lead strategy

Collecting foreign currency receivables early when a foreign currency is expected to depreciate, and paying foreign currency payables before they are due when a currency is expected to appreciate.

lag strategy

Delaying the collection of foreign currency receivables if that currency is expected to appreciate, and delaying payable if that currency is expeted to depreciate.

A lead 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.

False

An efficient market has many impediments to the free flow of goods and services.

False

The PPP theory tells us that a country with a high inflation rate will see an appreciation in its currency exchange rate.

False

A firm needs to develop a mechanism for ensuring it maintains an appropriate mix of tactics and strategies for minimizing its foreign exchange exposure. Which of the following is one of the common tactics that should be employed?

Firms need to, as far as possible, model and forecast future exchange rate movements.

law of one price

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

externally convertible currency

Limitations on the ability of residents to convet domestic currency, though nonresidents can convert their holdings of domestic currency into foreign currency.

bandwagon effect

Movement of traders like a herd, all in the same direction and at the same time, in response to each other's perceived actions.

Fisher effect

Nominal interest rates (i) in each country equal the required real rate of interest (r) and the exected rate of inflation over the period of time for which the funds are to be lent (l). That is, i = r + l

inefficient market

One in which prices do not reflect all available information.

currency swap

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

A pen costs £50 in Britain. An identical pen costs $70 in the United States when the exchange rate is £1 = $1.50. Which of the following is correct?

The U.S. offers a better deal.

spot exchange rate

The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day.

economic exposure

The extent to which a firm's future international earning power is affected by changes in exchange rates.

transaction exposure

The extent to which income from individual transaction is affected by fluctuations in foreign exchange values.

translation exposure

The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.

If lots of people want euros and euros are in short supply, and a few people want Japanese yen and yen are in plentiful supply, the yen is likely to _____ against the euro.

depreciate

Assuming the 60-day forward exchange rate was $1 = ¥110 and the spot exchange rate was $1 = ¥120, the dollar is selling at a(n) _____ on the 60-day forward market.

discount

The extent to which a firm's future international earning power is affected by changes in exchange rates in the long-run is known as _____.

economic exposure

When a firm insures itself against foreign exchange risk, it is

engaging in hedging.

The _____ suggests that given relatively efficient markets, the price of a "basket of goods" should be roughly equivalent in each country.

purchasing power parity theory

A Japanese tourist in New York goes to a bank to convert his yens into dollars. The exchange rate that will be used for conversion will be the _____.

spot exchange rate

arbitrage

The purchase of securities in one market fro immediate resale in another to profit from a price discrepancy.

foreign exchange risk

The rusk that changes in exchange rates will hurt the profitability of a business deal.

countertrade

The trade of goods and services for other goods and services.

If the spot rate is $1 = ¥120, and the 30-day forward rate is $1 = ¥130, the dollar is selling at a premium in the forward market.

True

The rate at which one currency is converted into another is known as the exchange rate.

True

When is a currency said to be externally convertible?

When only nonresidents can convert it into a foreign currency without any limitations.

forward exchange

When two parties agree to exchange currency and execute a deal at some specific date in the future.