Internat Business Chapter 10

Arbritrage

-Buying a currency low and selling it high -The purchase of securities in one market for the immediate resale in another to profit from a price discrepency

Countertrade

-Companies can deal with the non convertibility problem by engaging in countertrade -Which refers to a range of barter-lie agreements by which goods and services can be traded for other goods and services. -It makes sense when a country's currency is non convertible

Efficient Market

-Has no impediments (effect) to the free flow of goods and services, such as trade barriers. -This market is one in which few impediments to international trade and investment exist.

Transaction Exposure

-Is the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. -Such exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign countries. (extent to which income from individual transactions is affected by fluctuations in foreign exchange values.

Currency Swap

-Is the simultaneous purchase and sale of given amount of foreign exchange for two different value dates -Swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for limited period without incurring foreign exchange risk

Foreign Exchange Market

-Market for converting the currency of one country into that of another country -Without the FEM, international trade and international investment on the scale that we see today would be impossible (companies would have to resort to barter)

The Fischer Effect

-Nominal interest rates in each country equal the required real rate of interest and the expected rate of inflation over the period of time for which the funds are to be lent. -States that a country's "nominal" (i) interest rate is the sum of the required "real" (r) rate of interest and the expected rate of inflation over the period of for which the funds are to be lent (I)... i= r+I

Law of One Price

-States that in competitive markets free of transportation costs and barriers to trade (such as tariffs), identical products sold in different countries must sell for the same price when their prices is expressed in terms of the same currency.

Carry Trade

-Type of Speculation -Carry trade 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

Economic Exposure

A firms future international earning power is affected by changes in exchange rates. Is concerned with the long run effect of changes in exchange rates on future prices, sales and costs. A firms future international earning power is affected by changes in exchange rate.

International Fisher Effect

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 countries

Lead Strategy

Involves 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 depreciate

Lag 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

Inefficient Market

Market which prices do not reflect all available information, forward exchange rates will not be the best possible predictors of future spot exchange rates.

Translation Exposure

The impact of currency exchange rate changes on the reported financial statements of a company. Translation exposure is concerned with the present measurement of past events. The reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.

Foreign Exchange Market serves two purposes...

To convert one currency to another and to provide insurance against foreign exchange risk

Currency Speculation

Typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rate.

Nonconvertible Currency

When neither residents nor nonresidents are allowed to convert it into a foreign currency A currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency.

Externally Convertible Currency

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

Freely Convertible Currency

When the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with domestic currency.

Bandwagon Effect

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

Capital Flight

Occurs when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency Occurs when the value of the domestic currency is depreciating rapidly because of hyperinflation or when a country's economic prospects are shaky in other respects.

Forward Exchange Forward Exchange Rate

Occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. Exchange rates governing such future transactions are referred to as forward exchange rates

Spot Exchange

Rate at which a foreign exchange dealer converts one currency into another currency on a particular day (a spot rate for the day)

Exchange Rate

Rate at which one currency is converted into another