Chapter 17 - Finance

Rate not regulated by the government, so supply and demand in the market determine the currency's value

A floating or flexible exchange rate

- Certificates representing ownership of foreign stock held in trust.

American Depository Receipts (ADRs) *About 1,700 ADRs are now available in the United States, with most of them traded on the over-the-counter (OTC) market. However, more and more ADRs are being listed on the New York Stock Exchange. *

The exchange rate between any two currencies. - actually calculated on the basis of various currencies relative to the U.S. dollar.

Cross Rate

The country technically has its own currency but commits to exchange it for a specified foreign currency at a fixed exchange rate (like Argentina before its January 2002 crisis).

Currency board arrangement

- Medium- to long-term international market for fixed- and floating-rate debt. - Underwritten by an international bank syndicate and sold to investors in countries other than the one in whose currency the bond is denominated.

Eurobonds

- Fixed term, floating-rate bank loans with no early repayment. - An example is a eurodollar deposit, which is U.S. dollars deposited in a bank outside the U.S.

Eurocredits

- The risk that the value of a cash flow in one currency translated to another currency will decline due to a change in exchange rates. - For example, in the last slide, a weakening Australian dollar (strengthening U.S. dollar) would lower the U.S. dollar profit.

Exchange Rate Risk

A currency is set by the government and is allowed to fluctuate only slightly (if at all) around the desired rate, which is called par value

Fixed Exchange Rate

The country "pegs" its currency to another (or a basket of currencies) at a fixed rate. Slight fluctuations are okay, but the rate must stay within a desired range. For example, the Chinese yuan is pegged to a basket of currencies.

Fixed peg arrangement

- Issued in a capital market other than the issuer's. - The only thing foreign about it is the borrower's nationality.

Foreign bonds

The quoted price for a unit of foreign currency to be delivered at a specified date in the future

Forward Exchange Rate

Exchange rate determined by the market's supply and demand for the currency. Governments may occasionally intervene and buy or sell their currency to stabilize fluctuations.

Freely floating

_________ holds that investors should expect to earn the same return in all countries after adjusting for risk.

Interest rate parity

- The framework within which exchange rates are determined. - The blueprint for international trade and capital flows.

International Monetary System

__________ inflation leads to lower interest rates, so borrowing in low-interest countries may appear attractive to multinational firms.

Lower

Significant government intervention manages the exchange rate by manipulating the currency's supply and demand. The target exchange rates are kept secret to prevent currency speculators profiting from it.

Managed floating

The country uses either another country's currency as its legal tender (like the U.S. dollar in Ecuador) or else belongs to a group of countries that share a currency (like the euro).

No local currency

A firm can produce a liter of orange juice and ship it to Japan for $1.75 per unit. If the firm wants a 50% markup on the project, what should the juice sell for in Japan? Yen = 111.11 yen/$

Price = ($1.75)(1.50)(111.11 yen/$) = 291.66 yen

____________ implies that the level of exchange rates adjusts so that identical goods cost the same amount in different countries.

Purchasing power parity

Consider the Following Exchange Rates US $ to Buy 1 Unit: Japanese yen - 0.009 Australian dollar - 0.650 Are these currency prices direct or indirect quotations?

Since they are prices of foreign currencies expressed in dollars, they are direct quotations.

Quoted price for a unit of foreign currency to be delivered "on the spot" or within a very short period of time

Spot Exchange Rate

currencies in low-inflation countries tend to ________ against those in high-inflation rate countries, so the effective interest cost increases over the life of the loan.

appreciate

If grapefruit juice costs $2.00 per liter in the U.S. and PPP holds, what is the price of grapefruit juice in Australia? Spot exchange rate = $.65

e0 = Ph/Pf $0.6500 = $2.00/Pf Pf = $2.00/$0.6500 Pf = 3.0769 Australian dollars

The primary determinant of the spot/forward rate relationship is relative ________

interest rates

- A corporation that operates in two or more countries. - Decision making within the corporation may be centralized in the home country, or may be decentralized across the countries in which the corporation does business.

multinational corporation

The indirect quotation is the _______ of the direct quotation.

reciprocal

1.) _______ are the rates to buy currency for immediate delivery. 2.) ______ are the rates to buy currency at some agreed-upon date in the future.

1.) Spot rates 2.) Forward rates

Multinational Financial Management vs. Domestic Financial Management 1.)Different _____ denominations 2.) ______ risk 3.)_______ and legal ramifications 4.)Role of _________ 5.) Language and _______ differences

1.) currency 2.) Political 3.) Economic 4.) governments 5.) cultural

The indirect quotation represents the number of units of a 1.) needed to purchase one 2.).

1.) foreign currency 2.) U.S. dollar

Suppose one yen buys $0.0095 in the 30-day forward exchange market and rNOM for a 30-day risk-free security in Japan and in the U.S. is 4%. What does 1.) Ft = 2.) rh = 3.) rf = 4.) Does interest rate parity hold?

1.) ft = .0095 2.) rh = 4%/12 = .333% 3.) rf = 4%/12 = .333% 4.) For interest rate parity to hold, e0 must equal $0.0095, but we were given earlier that e0 = $0.0090, so interest rate parity does not hold.

Impact of Multinational Operations on Capital Budgeting Decisions 1.) Foreign operations are taxed _______, then repatriated funds may be taxed in the U.S. 2.) Foreign projects are subject to _______ risk. 3.) Repatriated funds must be converted to U.S. dollars (subject to ___________).

1.) locally 2.) political 3.) exchange rate risk

1.) If the U.S. dollar buys fewer units of a foreign currency in the forward than in the spot market, the foreign currency is selling at a ______ 2.) In the opposite situation, the foreign currency is selling at a _______

1.) premium 2.) discount

Why do firms expand into other countries? 1.)To seek ________ efficiency. 2.)To avoid _______ and regulatory hurdles. 3.)To seek new _______. 4.)To seek raw materials and new _______. 5.)To protect _______ and products. 6.)To _______. 7.) To retain ______.

1.) production 2.) political 3.) markets 4.) technology 5.) processes 6.)diversify 7.) customers

Under interest rate parity: 1.) Ft = 2.) Eo = 3.) rh= 4.)rf=

1.) t - period forward exchange rate 2.) Today's spot exchange rate 3.) Periodic interest rate in home country 4.) Periodic interest rate in foreign country

Refers to a decrease or increase, respectively, in the foreign exchange value of a floating currency.. These changes are caused by market forces rather than by governments

Depreciation or Appreciation of a currency

The technical term referring to the decrease or increase in the stated par value of a currency who value is fixed

Devaluation or revaluation of a currency