Global Business ch 9
PPP theory predicts that if a basket of goods costs $200 in the US and 20,000 yen in Japan, the dollar/yen exchange rate should be $________=1 yen.
0.01
International businesses have ___ main uses of foreign exchange markets.
4
Definition: Nominal interest rates in each country equal the required "real" rate of interest and the expected rate of inflation over the period for which the funds are to be lent.
Fisher Effect
One famous example of the bandwagon effect occurred when ____________ ____________ borrowed billions of pounds, sold those pounds for German deusche marks, and bought back the pounds at a better exchange rate. The bandwagon effect eventually made the value of the pound go down against the deusche mark.
George Soros
If someone engaged in carry trade by borrowing money from Japan and depositing it in a US bank, the person could lose money if the value of the ______________ currency increased against the other currency.
Japanese
___________ is the most important trading center, partly because it is the capital of the world's first major industrial trading nation.
London
Technical analysis is based on the premise that there are _____________ market trends and waves, and the _____________ trends and waves can be used to predict future trends and waves.
analyzable, previous
Definition: The purchase of securities in one market for immediate resale in another to profit from a price discrepancy.
arbitrage
It is 1 pm. In New York, the yen/dollar exchange rate is 125 yen=$1. In London, the rate is 120 yen=$1. A dealer could make a profit through ____________ by buying $1 million of yen in New York and selling it immediately for dollars in London.
arbitrage
When investors are free to transfer capital between countries and there are differences in real interest rates between the countries, _____________ will soon equalize them.
arbitrage
Definition: When traders move like a herd, all in the same direction at the same time, in response to each others' perceived actions.
bandwagon effect
Definition: Residents convert domestic currency into a foreign currency.
capital flight
Definition: 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.
carry trade
Forward exchange rates represent market participants' ____________ _____________ of likely spot exchange rates at specified future dates.
collective predictions
One of the four main uses that international businesses have for foreign exchange markets is the ability ____________ payments a company to its home currency.
converting
Companies can deal with the non-convertibility problem by engaging in _____________.
countertrade
Definition: The trade of goods and services for other goods and services.
countertrade
Definition: Involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.
currency speculation
One of the four main uses that international businesses have for foreign exchange markets is __________ ___________.
currency speculation
Definition: Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.
currency swap
Today's spot exchange rate is $1=120 yen, and the 90-day forward exchange rate is $1=110 yen. American Computer Co. owes Japanese Supply Inc. $1 million. In order to earn some money in the transaction, ACC enters a 90-day forward exchange deal and sells $1 million for 120 million yen and uses the money to pay JSI. In 90 days, ACC will receive a $1.09 million payment from the bank. ACC's transaction is an example of a ___________ ___________.
currency swap
____________ ____________ are used when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.
currency swap
Countries need an adequate supply of foreign exchange reserves to service their international _____________ commitments and to purchase _____________.
debt, imports
Capital flight is most likely to occur when the value of the domestic currency is ______________ rapidly or when a country's ____________ prospects are shaky.
depreciating, economic
Running a deficit on a balance-of-payments current account may result in the _____________ of the country's currency on the foreign exchange market.
depreciation
Although a foreign exchange can involve any two currencies, most transactions involve ___________ on one side.
dollars
Definition: The extent to which a firm's future international earning power if affected by changes in exchange rates.
economic exposure
An _____________ market is one in which prices reflect all available public information.
efficient
Definition: A market which has no impediments to the free flow of goods and services, such as trade barriers, and prices reflect all available public information.
efficient market
The ______________ _____________ school of thought believes that the foreign exchange market is an efficient market. Therefore, forward exchange rates can predict future spot rates, so it does not make sense to spend money to predict these future rates.
efficient market
A less extreme version of PPP theory states that given relatively efficient markets, the price of a basket of goods should be roughly ____________ in each country.
equivalent
A run on foreign exchange reserves will lead to a depreciation in the ____________ _____________ as residents and nonresidents unload their holdings of domestic currency on the foreign exchange markets.
exchange rate
Definition: The rate at which one currency is converted into another.
exchange rate
Definition: Exists when nonresidents can convert their holdings of domestic currency into foreign currency, but the ability of residents to convert the currency is limited in some way.
externally convertible currency
True/False: Both previous and more recent empirical tests of the efficient market school of thought have confirmed its hypothesis.
false
True/False: Currency speculation is a relatively safe and risk-free way for companies to make money overseas.
false
True/False: Due to the growth of cross-border trade and investment, the foreign exchange market has been growing sluggishly.
false
True/False: International forecasting services for future spot rates are typically very accurate.
false
True/False: PPP theory will hold if national markets are dominated by a few multinational enterprises that control prices, distribution channels, and product offerings between nations.
false
True/False: Twenty years ago, countertrade was not very important. More recently, however, countertrade is more significant.
false
True/False: When investors are free to transfer capital between countries, real interest rates will be different in every country.
false
When the growth in a country's money supply is ___________ than the growth in its output, price inflation is fueled.
faster
One function of the ___________ ___________ market is to provide some insurance against the risks that arise from volatile changes in exchange rates.
foreign exchange
An increase in a country's money supply changes the relative demand and supply conditions in the _____________ ______________ ______________.
foreign exchange market
Definition: A market for converting the currency of one country into that of another country.
foreign exchange market
Governments limit convertibility of currency to preserve their _____________ ____________ ______________.
foreign exchange reserves
Definition: The risk that changes in exchange rates will hurt the profitability of a business deal.
foreign exchange risk
Definition: When two parties agree to exchange currency and execute the deal at some specific deal in the future.
forward exchange
When a firm enters into a ____________ ____________ contract, it is taking out insurance against the possibility that future exchange rate movements will make a transaction unprofitable by the time that transaction has been executed.
forward exchange
American Computer Co. wants to buy a thousand laptops from Japanese Supply Inc. at the end of the month. However, ACC is afraid that by the end of the month, Japanese currency will increase in value against the dollar. The two companies agree to allow ACC to purchase the computers at a pre-decided _____________ _____________ ____________ from JSI to lower the financial risk for ACC.
forward exchange rate
Definition: Exists when the government of a country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.
freely convertible currency
Definition: Analysis that draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.
fundamental analysis
The inefficient market school of thought has two bases on which forecasts can be prepared: the _____________ analysis, and the _____________ analysis.
fundamental, technical
PPP theory may fail to predict exchange rates accurately because _____________ intervene in the foreign exchange market in attempting to influence the value of their currencies.
governments
Definition: The process of insuring one's business against foreign exchange risk by using forward exchanges or currency swaps.
hedging
In countries where inflation is expected to be high, interest rates will be ___________.
high
The balance-of-payments situation of a country is not a fundamental predictor of future exchange rate movements because it depends on whether people in other countries are willing to __________ the country's currency.
hold
Definition: An explosive and seemingly uncontrollable price inflation in which money loses value very rapidly.
hyperinflation
Definition: A market in which prices do not reflect all available information.
inefficient market
The _____________ _____________ school of thought believes that the foreign exchange market is inefficient, so prices will not reflect all available information.
inefficient market
Interest rates reflect expectations about likely future ___________ rates.
inflation
____________ occurs when the quantity of money in circulation rises faster than the stock of goods and services.
inflation
Definition: For any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.
international Fisher effect
One of the four main uses that international businesses have for foreign exchange markets is ___________ spare cash for short terms in money markets.
investing
Two reasons that PPP theory and the International Fisher Effect are not good at explaining short-term movements in exchange rates could be the impact of ____________ psychology and the ____________ effect on short-run exchange rate movements.
investor, bandwagon
For price discrimination to work, arbitrage must be ____________.
limited
One of the four main uses that international businesses have for foreign exchange markets is __________ a foreign company for its products or services in its country's currency.
paying
The spot exchange rate is $1=120 yen. The agreed-upon forward exchange rate between two companies is $1=140 yen. In this case, the dollar is selling at a ____________ in the forward market because the foreign exchange dealers' expectation is that the dollar will ____________ against the yen in the future.
premium, appreciate
The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the ___________ ____________ ___________ ____________.
purchasing power parity puzzle
The extreme version of the PPP theory is that comparing the prices of identical products in different currencies would make it possible to determine the "___________" or PPP exchange rate that would exist if markets were efficient.
real
The exchange rate allows us to compare the ___________ prices of goods and services in different countries.
relative
PPP theory predicts that changes in ___________ ___________ will result in a change in exchange rates.
relative prices
_____________ monetary growth, relative ____________ rates, and _____________ interest rate differentials are all good predictors of long-run changes in exchange rates.
relative, interest, nominal
A ____________ occurs when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency.
run
High-speed computer linkages between trading centers around the globe have effectively created a __________ market with no significant difference in exchange rates quoted in the trading centers.
single
Two features of the foreign exchange market are (1) the fact that the market never __________, and the integration of the various __________ centers.
sleeps, trading
When two parties agree to exchange currency and execute the deal immediately, the transaction is referred to as a ____________ ____________.
spot exchange
According to the International Fisher Effect, the ____________ _____________ ____________ between Country A and Country B can be modeled: [(S1 - S2) / S2] x 100 = iA - iB
spot exchange rate
Definition: The exchange rate at which a foreign exchange dealer will convert one currency into another currency on a particular day.
spot exchange rate
In the equation [(S1 - S2) / S2] x 100 = iA - iB , S1 stands for the _____________ _____________ ____________ at the beginning of the period, S2 stands for the _______________ _____________ _____________ at the end of the period, iA stands for the ______________ ______________ ____________ in country A, and iB stands for the _______________ _____________ ______________ in country B.
spot exchange rate, spot exchange rate, nominal interest rate, nominal interest rate
___________ are minor participants in the foreign exchange market; ___________ engaged in international trade are major ones.
tourists, companies
Definition: Extent to which income from individual transactions is affected by fluctuations in foreign exchange values.
transaction exposure
Definition: The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.
translation exposure
PPP theory may fail to predict exchange rates accurately because it assumes away _____________ costs and ___________ to trade.
transportation, barriers
True/False: According to the inefficient market school of thought, it does make sense for international businesses to invest in forecasting services.
true
True/False: Exchange rates are determined by the demand and supply of one currency relative to the demand and supply of another.
true
True/False: External convertibility can limit domestic companies' ability to invest abroad, but allows foreign companies to do business in the home country.
true
True/False: More forward exchange transactions occur than spot exchange transactions in the international market.
true
True/False: Spot exchange rates can change on a minute-by-minute basis.
true
True/False: The Fisher Effect predicts a strong relationship between inflation and interest rates.
true
True/False: There is no theoretical rationale for the assumption of predictability of future trends in technical analysis.
true
True/False: While the International Fisher Effect is a good predictor of long-run relationships between interest rates and spot exchange rates, it is a poor predictor of short-run relationships.
true
The Fisher Effect equation is: _________ _________ ________ = ________ _________ _________ ___ _________ + _________ ________ ___ _________
nominal interest rate, required real rate of interest, expected rate of inflation
Definition: Exists when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency.
nonconvertible currency
Every year, The Economist publishes its own version of the PPP theorem, called the __________ __________ __________ after the product it has chosen to use as its "basket of goods."
Big Mac Index
Since __________ theory shows a link between inflation and exchange rates, and the ___________ ___________ shows a link between interest rates and expectations about inflation, there must be a link between interest rates and exchange rates.
PPP, Fisher Effect
Definition: Delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate.
lag strategy
Definition: 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 terms of the same currency.
law of one price
Definition: Attempting to collect 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.
lead strategy
According to empirical tests, PPP theory only makes accurate predictions in the __________ run.
long
An increase in the ___________ ___________ makes it easier for banks to borrow from the government and for individuals and companies to borrow from banks.
money supply
Definition: Analysis that uses price and volume data to determine past trends, which are expected to continue into the future.
technical analysis
