International Financial Management Final Exam Study Guide
111. What is an SDRi? How is it calculated?
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47. What is the big figure in bid-ask quotes? What is the small figure?
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How do you calculate the dollar change in a futures contract?
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How do you determine the effect on a performance bond due to changes in the futures value?
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What are some possible real-world analogs for the real risk-free rate?
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What are the types of information asymmetry we discussed?
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What creates a positive position for a futures contract buyer?
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What is the current target for the fed funds rate?
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45. What is the bid-ask spread?
- - Interbank FX traders buy currency for inventory at the bid price and sell from inventory at the higher offer or ask price.
How can we profit from covered interest arbitrage?
- (1+i$) = (F/S) X (1+iFC) * Where i$ is the rate earned on U.S. dollars iFC is the interest rate earned on the foreign currency F is the forward rate of F($/FC) S is the spot exchange rate of S($/FC)
109. Approximately how many countries are members of the IMF?
- 189 Countries
Why would a company choose to hedge receivables?
- A company would choose to hedge receivables if they believe that the foreign currency will weaken of the life of the receivables collection period.
What does a call or put option contract provide to a buyer?
- A contract giving the owner the right, but not the obligation, to buy or sell a given quantity of a product at a specified price at some point in the future.
121. What is the backstop in Brexit and how might it affect the approval of Brexit?
- A deal to ensure a hard border—one with guard posts and checks—never happens between Northern Ireland (U.K.) and Ireland - Northern Ireland, not the rest of the U.K., would still follow some EU rules - Only applies if no deal is reached
What is a futures contract?
- A foreign currency futures contract calls for future delivery of a standard amount of foreign exchange at a fixed time, place, and price. - A standardized foreign exchange contract with a future delivery date that is traded on organized exchanges.
What are the differences between a forward and futures contract?
- A futures contract is SIMILAR to a forward contract in that it specifies that a certain currency will be exchanged for another at a specified time in the future at prices specified today. - A futures contract is DIFFERENT from a forward contract in that futures are standardized contracts trading on organized exchanges with daily resettlement through a clearinghouse.
123. What is a representative office? Foreign bank branch?
- A representative office is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents.
What is covered interest arbitrage?
- A situation that occurs when IRP does not hold, thereby allowing certain arbitrage profits to be made without the arbitrageur investing any money out of pocket or bearing any risk.
What is purchasing power parity and absolute purchasing power parity?
- Absolute Purchasing Power Parity: Without barriers, consumers shift their demand to wherever prices are lower. ** Prices of the same basket of products in two different countries should be equal when measured in a common currency. - Purchasing Power Parity (PPP): A theory stating that the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels of a commodity basket.
What is an initial performance bond?
- An initial collateral deposit needed to establish an asset position.
49. What are some standard terms in the forward market?
- Bank quotes for 1, 3, 6, 9, and 12 month maturities are readily available for forward contracts.
What may affect the ability of PPP to hold up?
- Big Macs cannot be traded across borders - Country-specific factors -May be impacted by nontradables
115. What is Brexit?
- British decision to leave the European Union based on the outcome of the referendum held in June 2016.
110. Approximately how large is the IMF budget?
- Budget of $1.072 billion
106. What is Greenfield investing?
- Buying land in foreign countries - Greenfield investment - Building new facilities from the ground up.
126. What are examples of Tier 1 Equity?
- Capital to asset ratio in excess of 4.5%
122. Where are the largest banks in the world located?
- China in the US.
What is a maintenance performance bond?
- Collateral needed to maintain an asset position.
107. What is cross-border m&a?
- Cross-border acquisition Purchase of existing business. Represents 40-50% of FDI flows. - Cross-border acquisitions are a politically sensitive issue
119. How will immigration be impacted with Brexit?
- EU Citizens enjoy preferential access to Britain - There will likely be a reduction in free movement of people - "Free movement will end." British Prime Minister Theresa May, 11/15/2018 - Preference given to "best and brightest" over the lower-skilled, low-pay workers
114. Which IMF function did we discuss for Japan? European Union? Anguilla?
- Economic Surveillance for Japan - Lending - Capacity Development
38. What is a foreign exchange rate?
- Encompass the conversion of purchasing power from one currency into another, bank deposits of foreign currencies, and trading in foreign currency spot, forward, futures, swap, and options contracts. - Is the price of 1 currency expressed in terms of another currency. - Allows the transfer of purchasing power of 1 currency into another.
113. Which type of lending is most common for the IMF?
- Extended Fund Facility
What is the international fisher effect and how do we calculate it?
1) International Fisher Effect: - An increase or decrease in the expected inflation rate in a country will cause a proportionate increase or decrease in the interest rate in the country 2) Formula: i$ = [P$ + E(expected rate of US inflation $)] + [P$E(expected rate of US inflation $)] - Where: -P$= is the equilibrium expected "real" U.S. interest rate. -E(Pi symbol$)= is the expected rate of U.S. inflation. -i$= is the equilibrium expected nominal U.S. interest rate.
102. What are the factors of production?
1) Land 2) Labor 3) Capital 4) Entrepreneurial ability
What is arbitrage?
- The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain, guaranteed profits.
What is the Forward Premium/Discount?
- The amount over (under) the spot exchange rate for a forward rate that is often expressed as an annualized percent deviation from the spot rate.
10. What was the main catalyst for the European debt crisis?
- The difference in budget deficit and the actual deficit. The Greek government lied about these underlying numbers. Investors sold off greek government bonds, ("JUNK" is what they classified any debt capital raising from Greece). - Underestimations of Tax revenues and over estimations on many things...
What is translation exposure for foreign currency?
- The effect of an unanticipated change in the exchange rates on the consolidated financial reports of an MNC.
48. What is a forward quote?
- The forward market for FX involves agreements to buy and sell foreign currencies in the future at prices agreed upon today. - Bank quotes for 1, 3, 6, 9, and 12 month maturities are readily available for forward contracts. - Longer-term swaps are available.
What is economic exposure for foreign currency?
- The possibility that cash flows and the value of the firm may be affected by unanticipated changes in the exchange rates.
What is transaction exposure for foreign currency?
- The potential change in the value of financial positions due to changes in the exchange rate between the inception of a contract and the settlement of the contract.
What is the strike price on an option?
- The prespecified price paid when an option is exercised.
What does it mean to be marked-to-market?
- The process of establishing daily price gains and losses in the futures market by the change in the settlement price of the futures contract.
104. How does the U.S. compare to other countries in labor cost?
- They are 8th with 35.67 Average hourly costs.
129. What is too-big-to-fail? When did it start?
- Too Big To Fail - "The federal government will currently not allow any of the nation's largest banks to fail. - It started in 1982
120. Why will the UK have to pay to leave the EU?
- UK will pay £39 billion to the EU Referred to as the "Divorce Bill" - UK agreed to support EU long-term budget - Previously listed amounts included €60 million or €100 million
What can we infer from calculating relative purchasing power parity?
- We can infer whether a currency will appreciate or depreciate.
What makes a basket of goods a good candidate for purchasing power parity?
- Will only hold if the composition of the basket of goods is the same across countries
20. Are there any flaws to the Bretton Woods System?
- Yes, the US had to supply enough dollars. - Its continued balance-of-payment deficits lead to its collapse. - Depreciated its value
34. What are some downsides to using debt as a way to help with the agency problem?
1) If managers fail to pay interest and principal to creditors, the company can be forced into bankruptcy, and managers may loose their jobs. 2) Excessive debt can create its own agency problem.
100. Which countries have significant FDI inflows? Outflows? Stock?
1) Inflows: Both developing and developed nations are the recipient of inflows of FDI. 2) Outflows: - Several developed nations are the sources of FDI outflows. * Most world-wide FDI comes from the developed world. - This implies that MNCs domiciled in these countries should have certain comparative advantages in undertaking overseas investment projects. 3) Stock: - Investors in foreign stock allows for ricks aversion through international diversification
4. Is a weaker currency good or bad for companies?
A: Strong and Weak Currency 1) Weak Currency: - A weaker dollar is good for sales by US companies that sell to countries with a relatively stronger currency. 2) Stronger Currency: - A stronger dollar is good for costs incurred by US companies that buy a lot of foreign goods/materials.
37. What does the Systematic Risk Regulation section of the Dodd-Frank Act call for?
A: Systematically important firms are identified & their financial condition is monitored.
30. When the media discusses the trade deficit, what are they normally talking about?
A: The Media is referencing the imports exceeding exports by the US.
6. What are market imperfections?
Definition: ***** They are frictions & impediments that prevent markets from functioning perfectly ***** >>>> Includes: Legal restrictions on the movements of: 1) goods (Tariffs), 2) people & money, 3) Transaction Costs, 4) Shipping Costs, & 5) Tax Arbitrage - a variety of barriers still hamper free movements of people, goods, services, and capital across national boundaries. These barriers include legal restrictions, excessive transaction and transportation costs, information asymmetry, and discriminatory taxation. The world markets are thus highly imperfect. As we will discuss later in this book, market imperfections, which represent various frictions and impediments preventing markets from functioning perfectly, play an important role in motivating MNCs to locate production overseas. Imperfections in the world financial markets tend to restrict the extent to which investors can diversify their portfolios.
24. In terms of demand, what happens when the dollar depreciates?
Demand Increases as the US Dollar depreciates. Explanation: - When the dollar depreciates against foreign currencies, exports should increase and imports should decrease. This is because our products get cheaper for foreigners and their products get to me more expensive for us. - In such a case, there gets to be increased demand for American products. That means that aggregate demand goes up.
36. What is the Volker Rule?
Deposit-Taking banks are banned from proprietary trading & from owning more than a small fraction of hedge funds, & private equity firm.
39. In a spot exchange rate quote, which currency is the base currency?
- The US Dollar
117. When will Brexit take effect?
- The U.K. would formally leave March 29, 2019
6. How can an expanded opportunity set be valuable to an investor?
- Firms can gain from greater economies of scale when their tangible & intangible assets are deployed on a global basis. * True for Corporations & Investors ** Establishes diversity. (Diversify risks among international assets) - firms can locate production in any country or region of the world to maximize their performance and raise funds in any capital market where the cost of capital is the lowest. In addition, firms can gain from greater economies of scale when their tangible and intangible assets are deployed on a global basis. - Individual investors can also benefit greatly if they invest internationally rather than domestically. Suppose you have a given amount of money to invest in stocks. You may invest the entire amount in U.S. (domestic) stocks. Alternatively, you may allocate the funds across domestic and foreign stocks. If you diversify internationally, the resulting international portfolio may have a lower risk or a higher return (or both) than a purely domestic portfolio. This can happen mainly because stock returns tend to covary less across countries than within a given country. Once you are aware of overseas investment opportunities and are willing to diversify internationally, you face a much expanded opportunity set and you can benefit from it. It just doesn't make sense to play in only one corner of the sandbox. Thus, an important "normative" theme we will study throughout this book is: how to maximize the benefits from the global opportunity set, while judiciously controlling currency and political risks and managing various market imperfections.
How do you calculate the implied purchasing power rate of exchange?
- Formula: Implied PPP= Implied Rate - Actual Rate/Actual Rate
How do you calculate the forward premium?
- Forward Premium = (Forward-Spot/Spot)X [360/N] * N = # of days in the period
103. How can a firm take advantage of labor markets in FDI?
- If there exist restrictions on the flow of workers across borders, then labor services can be underpriced relative to productivity. - The restrictions may be immigration barriers or simply social preferences.
What is foreign direct investment?
- Investment in a foreign country that gives the MNC a measure of control.
40. How does the foreign exchange market compare to other financial markets in the world?
- It encompasses the conversion of 1 currencies purchasing power into another 1. - Bank deposits of foreign currency & - Trading in Foreign Currency Spot, Forward, Futures, Swaps, and Option Contracts.
31. What is Foreign Direct Investment?
- It is a measure of Foreign Control in the US. - Investment in a foreign country that gives a MNC some measure of control.
128. What is a capital buffer?
- It is a way that a bank can plan to hold on to a certain amount of earnings to protect against risk factors. - Example: 1) Countercyclical Capital Buffer: - The lower the Capital to Asset Ratio in excess of 4.5%, the higher the percentage of earnings unavailable for distributions. This to protect the company from cyclical economic risk.
Which other party can hedge a company's foreign currency transaction exposure?
- It is possible stockholders can manage the exposure themselves **** However, stockholders do not have the same advantages as the corporation.
How do you calculate the value of an option?
- Its value is derived from the value of an underlying security.
116. When did the Brexit vote occur?
- June 23rd, 2016
46. What is a bid-ask spread percentage and how do you calculate it?
- Percent Spread = [(Ask price-Bid price)/Ask price] X 100
108. Which type of FDI is preferred by the host country?
- Regional security
130. What is a SIFI?
- Response from the 2007-2009 Financial Crisis Banks that if they failed, would "cause widespread disruptions in financial markets that could not easily be contained." (Labonte, 2015)
35. How are multi-national firms affected by agency costs?
- Self-interested managers may also waste funds by undertaking unprofitable projects that benefit themselves but not investors. - For example, managers may misallocate funds to take over other companies and overpay for the targets if it serves their private interests. Needless to say, this type of investment will destroy shareholder value. - What is more, the same managers may adopt antitakeover measures for their own company in order to ensure their personal job security and perpetuate private benefits. In the same vein, managers may resist any attempts to be replaced even if shareholders' interests will be better served by their dismissal. - These managerial entrenchment efforts are clear signs of the agency problem.
118. In the context of Brexit, what is a single market? Customs union?
- Single Market: - New agreement may have impacts on tariffs and customs inspections - Rules of origin become more complicated - Customs Union: - EU Citizens enjoy preferential access to Britain - There will likely be a reduction in free movement of people - "Free movement will end." British Prime Minister Theresa May, 11/15/2018 - Preference given to "best and brightest" over the lower-skilled, low-pay workers
What is political risk? Examples?
- Sovereign governments have the right to regulate the movements of goods, capital, and people (Labor) across their borders. These laws sometimes change in unexpected ways. - Political risk ranges from unexpected changes in tax rules to outright expropriation of assets held by foreigners. Political risk arises from the fact that a sovereign country can change the "rules of the game" and the affected parties may not have effective recourse.
How do you profit by owning a forward if there are changes in the spot market?
- Speculators: earn a profit when they offset futures contracts to their benefit. To do this, a speculator buys contracts then sells them back at a higher (contract) price than that at which they purchased them. Conversely, they sell contracts and buy them back at a lower (contract) price than they sold them. In either case, if successful, a profit is made. - Hedgers: Commodity prices in the cash markets have a fundamental relationship to the futures prices. When the forces of supply and demand shift and drive prices up and down in the cash markets, futures prices tend to rise and fall in a parallel fashion.
Why might that other party may not be as prepared to hedge as the company?
- Stockholders do not have the same advantages as the corporation.
5. What is an example of Political Risk?
-Multinational firms and investors should be particularly aware of political risk when they invest in those countries without a tradition of the rule of law. The meltdown of Yukos, the largest Russian oil company, provides a compelling example. Following the arrest of Mikhail Khodorkovsky, the majority owner and a critic of the government, on fraud and tax evasion charges, the Russian authorities forced Yukos into bankruptcy. The authorities sued the company for more than $20 billion in back taxes and auctioned off its assets to cover the alleged tax arrears. This government action against Yukos, widely viewed as politically motivated, inflicted serious damage on international shareholders of Yukos, whose investment values were wiped out. It is important to understand that the property rights of shareholders and investors are not universally respected.
23. What are the three conditions in the impossible trinity?
1) A Fixed-Exchange Rate 2) Free International Flows of Capital 3) Independent Monetary Policy
What is the break-even between a forward hedge and an option hedge?
1) B-E Between Forward Hedge and Option Hedge: Forward Proceeds = (Receivables Due)St - Cost of Options St = [Forward Proceeds + Cost of Options]/ Receivables Due
What is the break-even between a forward hedge and a money market hedge?
1) B-E between a forward hedge and a money market hedge: Given Loan Proceeds Forward Proceeds = Loan Proceeds X (1+r) 2) B-E between a forward hedge and a money market hedge: Given Forward Proceeds Loan Proceeds = Forward Proceeds/(1+r)
124. What is Basel I? Basel II? Basel III?
1) Basel I: - Capital Adequacy minimums - Measures capital to four categories of risk-weighted assets - Criticisms 1) Static requirement 2) No consideration for market or credit risk 2) Basel II: - Three pillars - Capital Requirements - Supervisory review - Disclosure 3) Basel III: - Liquidity requirements - Increased capital requirements - Capital buffer 1) 2.5% of risk-weighted assets 2) Non-compliance limits bank payouts
125. What are the capital requirements for Basel I and III?
1) Basel I: 2) Basel III: - 2.5% of risk-weighted assets - Non-compliance limits bank payouts
How do you calculate the profit for a either call or put option?
1) Call Options: - The Buyer of a Call Option: Profit = [Spot Rate-(Strike Price + Premium)] X Position - The Writer of a Call Option: Profit = [Premium-(Spot Rate-Strike Price)] X Position 2) Put Options: - The Buyer of a Put Option: Profit = [Strike Price-(Spot Rate + Premium)] X Position - The Writer of a Put Option: Profit = [Premium-(Strike Price - Spot Rate)] X Position
What is the profit profile for a call or put option?
1) Call: - Buyer: It is a constant line until some point it goes upward - Writer: It is a constant line until some point it slopes downward 2) Put Option - Buyer: As price goes down eventually the line slopes upward -Writer: As price goes down eventually the line slopes downward
What are capital goods, intermediate goods, and consumer goods?
1) Capital Goods: Machinery, Buildings, etc. inventory 2) Intermediate Goods: Goods that are bought then manufactured or transformed into a final good. Steel and aluminum 3) Consumer Goods: The final form of a good available to consumers. Cell phone, car, etc.
29. Does the U.S. normally have a positive balance or negative balance in the current account? Capital account?
1) Current Account = Negative 2) Capital Account = Positive
42. What are brokers? Dealers?
1) Dealers: Nonbank dealers are large nonbank financial institutions such as investment banks, mutual funds, pension funds, and hedge funds, whose size and frequency of trades make it cost-effective to establish their own dealing rooms to trade directly in the interbank market for their foreign exchange needs. In 2016, nonbank dealers accounted for 50 percent of FX trading volume. 2) Brokers: FX brokers match dealer orders to buy and sell currencies for a fee, but do not take a position themselves. Brokers have knowledge of the quotes offered by many dealers in the market. Today, however, only a few specialized broking firms still exist. The vast majority of interbank trades flows over Thomson Reuters and ICAP platforms. The International Finance in Practice box "Where Money Talks Very Loudly" explains how FX trading has changed over the past several years and how nonbank dealers using electronic trading platforms can compete with bank traders and other non-bank dealers.
112. What are the three functions of the IMF?
1) Economic Surveillance 2) Lending 3) Capacity Development
International Money Markets:
1) Eurocurrency 2) Eurobank 3) LIBOR
28. What does the capital account include?
1) Foreign Direct Investment (FDI) 2) Portfolio Investment 3) Other Investments
********* BE SURE TO KNOW THE DIFFERENCE BETWEEN **********
1) Foreign Exchange Risk 2) Political Risks 3) Market Imperfections 4) Expanded Opportunity Set
What are the three ways we discussed that can be used to hedge transaction exposure?
1) Forward Market Hedge 2) Money Market Hedge 3) Option Market Hedge
What is a forward market hedge? How do you calculate it? What does it mean to the company?
1) Forward Market Hedge: - A method of hedging exchange risk exposure in which a foreign currency contract is sold or bought forward. 2) Formula: Gain = (F-St) X Position 3) What does it mean to the company?: - To make the decision on whether or not to hedge: - St = is the firm's expected spot exchange rate at maturity. - If St = F then the gain/loss is approximately zero. - If St < F then the firm is likely to hedge. - If St > F then the firm is likely to not hedge.
18. What are the features of the medium of exchange function?
1) Hold Monetary Value 2) Commonly Valued Asset 3) Easy to carry 4) Can't Deteriorate 5) Double Coinage
What makes an options (call or put) in-, at-, or out-of-the-money?
1) IN-The-Money: - Call: if the spot price is greater than the exercise price - Put:if the spot price is less than the exercise price 2) At-The-Money: - Call:if the spot price equals the exercise price - Put: if the spot price equals the exercise price 3) Out-of-The-Money: - Call: if the spot price is less than the exercise price - Put: if the spot price is greater than the exercise price
7. What is the goal of the firm in the U.S.? What other countries generally have the same goal?
1) Maximize SHAREHOLDERS Wealth 2) Anglo-Saxon Countries *** This is accomplished by increasing the market value of the firm. *** EXAMPLE & Further Explanation: - the fundamental goal of sound financial management is shareholder wealth maximization. Shareholder wealth maximization means that the firm makes all business decisions and investments with an eye toward making the owners of the firm—the shareholders—better off financially, or more wealthy, than they were before. Whereas shareholder wealth maximization is generally accepted as the ultimate goal of financial management in "Anglo-Saxon" countries, such as Australia, Canada, the United Kingdom, and especially the United States, it is not as widely embraced a goal in other parts of the world. - In countries like France and Germany, for example, shareholders are generally viewed as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks, and so forth. European managers tend to consider the promotion of the firm's stakeholders' overall welfare as the most important corporate goal. - In Japan, on the other hand, many companies form a small number of interlocking business groups called keiretsu, such as Mitsubishi, Mitsui, and Sumitomo, which arose from consolidation of family-owned business empires. Although keiretsu have weakened in recent years, Japanese managers still tend to regard the prosperity and growth of their keiretsu as the critical goal; for instance, they tend to strive to maximize market share, rather than shareholder wealth.
8. What are some other goals for international firms?
1) Maximize STAKEHOLDERS (Shareholders, Employees, Suppliers, and Customers) Wealth 2) Minimize Principal-Agent Conflict (PAC) >>> The PAC arises when 1 party, the AGENT (Managers) act on behalf of another party, the PRINCIPAL (Owners) 3) Enhance the quality of Corporate Governance >>> Corporate Governance is the financial & legal framework for regulating the relationship between a companies management & it's shareholders - A firm cannot stay in business to maximize shareholder wealth if it treats employees poorly, produces shoddy merchandise, wastes raw materials and natural resources, operates inefficiently, or fails to satisfy customers. Only a well-managed business firm that profitably produces what is demanded in an efficient manner can expect to stay in business in the long run and thereby provide employment opportunities.
Have the U.S. and China talked about the tariffs over the course of implementing them?
1) May 3rd through 7th, 2018: Trade talks in Beijing, no resolution May 20th, 2018: China agrees to buy more U.S. goods and trade war is put on hold May 29th, 2018: U.S. reinstates plans to place tariffs
16. What are the functions of money?
1) Medium of Exchange 2) Unit of Account 3) Store Value
17. What is meant by medium of exchange? Unit of account? Store of value?
1) Medium of Exchange: - Eliminates the trouble of finding a double coincidence of needs. - Promotes Specialization. 2) Unit of Account: - Used to measure value in the economy - Reduces Transaction Costs 3) Store of Value: - Used to save purchasing power over time - Other assets also serve this function; money is liquid
27. What are the categories of current accounts? What are some examples of each?
1) Merchandise Trade 2) Services 3) Factor Income 4) Unilateral Transfers
What is a money market hedge? How do you calculate it? What does it mean to the company?
1) Money Market hedge: - A method of hedging transaction exposure by borrowing and lending in the domestic and foreign money markets. 2) Formula: Forward Proceeds = Loan Proceeds X (1+r) 3) What does it mean to the company?: - Comprised of lending and borrowing in the domestic and foreign money markets 1) Borrow the present value (PV) of the foreign currency (FC). 2) Exchange PV of FC at spot for domestic currency. 3) Invest domestic currency at domestic rate. 4) Collect FC and use it to repay loan. 5) Receive maturity value of domestic currency.
What is an option market hedge? How do you calculate it? What does it mean to the company?
1) Option Market Hedge: - Use of put and call options to limit the downside risk of transaction exposure while preserving the upside potential. The price of such flexibility is the option premium. 2) Formula: Forward Proceeds = (Receivables Due)St - Cost of options 3) What does it mean to the company?: - If you are receiving funds, you are worried about the value of the foreign currency falling. - If the value of a foreign currency (pounds) falls in the spot market it will buy less domestic currency (dollars). - This means that if a foreign company is going to pay for your goods in their currency, you will receive less dollars. - To protect against falling values of a foreign currency, buy a put option.
What is Purchase Power Parity and relative purchasing power parity and how do we calculate it?
1) Purchase Power Parity: - P$ = Pfc X Spot - Spot = P$/Pfc ** P = Price of $ or fc 2) Relative Purchase Power Parity: - e = Inflation rate of $ - Inflation rate of FC ** e = rate of change
What is a long position in a forward? Short position?
1) Short Position: - the party with the agreement to sell a Forward or Spot rate contract. 2) Long Position: - The party with the agreement to buy a Forward or Spot rate contract.
127. What were the issues with Basel I?
1) Static Requirement 2) No consideration for market or credit risks
25. What are the three components of the balance of payments?
1) The Current Account 2) The Capital Account 3) The Official Reserve Account
101. Why to firms invest overseas?
1) Trade barriers 2) Labor market imperfections 3) Intangible assets 4) Vertical integration 5) Product life cycle 6) Shareholder diversification
What does it mean if a currency is under- or over-valued within the context of purchasing power parity?
1) Under-Valued: - Implied rate is less than the Actual Rate leading to a negative Implied PPP 2) Over-Valued: - Implied rate is greater than the actual rate leading to a positive Implied PPP
105. What is vertical integration? What are the two types? How would it drive FDI?
1) Vertical Integration: - MNCs may undertake FDI in countries where inputs are available in order to secure the supply of inputs at a stable accounting price. 2) Two Types: 1. Forward 2. Backward 3) How it drives FDI: - Companies drive FDI through investment in foreign countries for inputs and resources
41. When does the foreign exchange market operate?
24/7
What are the percentages of most of the tariffs between China and U.S.?
25%
2. What is foreign exchange risk?
A: The risk that foreign currency profits may evaporate in dollar terms (Dollar Depreciates or Appreciates) due to unanticipated unfavorable exchange rate movements. *** Customers are foreign, and the dollar depreciates, the customers can buy more of our products.*** - Exchange rate uncertainty will have a pervasive influence on all the major economic functions, including consumption, production, and investment. When firms and individuals are engaged in cross-border transactions, they are potentially exposed to foreign exchange risk. - EXAMPLE: > In integrated financial markets, individuals or households may also be seriously exposed to uncertain exchange rates. For example, since the EU accession, many Hungarians have borrowed in terms of the euro or Swiss franc to purchase houses. They were initially attracted by the easy availability and low interest rates for foreign currency mortgage loans. However, as the Hungarian currency, forint, was falling against the euro and Swiss franc during the recent global financial crisis, the burden of mortgage payments in terms of forint has increased sharply, forcing many borrowers to default.
What is the difference between an American and European option?
American: - An option that can be exercised at any time during the option contract. European: - An option that can be exercised only at the maturity date of the contract.
44. What is a bid quote? Ask quote?
Bid: - The price at which dealers will buy a financial asset - The bid price is the price a dealer is willing to pay you for something. Ask: - The price at which a dealer will sell a financial asset. - The ask price is the amount a dealer wants you to pay for something.
3. How does foreign exchange risk affect companies that mostly import? Export?
EX: FX Risk- Exports and Imports 1) EXPORTS: *** If your customers are foreign (Exporting goods to a foreign market) and the US Dollar Depreciates (Value of the US$ goes down relative to a foreign currency such as UK Pound or Euro), they can buy more of your products. *** - Suppose Mexico is a major export market for your company and the Mexican peso depreciates drastically against the U.S. dollar, as it did in December 1994. This means that your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall. 2) IMPORTS: ***If you purchase a significant amount of goods from outside the country, you will have to spend more dollars for the same goods.*** - If the American dollar Appreciates compared to the Euro, That means the US dollar has more purchasing power which means you can buy more imports.
22. What is a free float system of currency exchange rates?
Free-Float System of Currency Exchange Rates: - Free floating: A floating exchange rate can be classified as free floating if intervention occurs only exceptionally and aims to address disorderly market conditions and if the authorities have provided information or data confirming that intervention has been limited to at most three instances in the previous six months, each lasting no more than three business days. - Examples are Canada, Mexico, Japan, the U.K., United States, and euro zone.
9. What country did the European debt crisis start with?
Greece
11. What countries were involved with debt problems during the European debt crisis?
Greece, Spain, Portugal, Italy, and Ireland.
12. Has trade generally increased or decreased over time?
Increased, but is more recently changing.
What types of goods were most frequent in the first two rounds of tariffs?
Input goods such as steel and aluminum and Consumer goods such as wheat and soy beans.
13. What is invisible trade?
Invisible Trade: Is a business transaction that occurs with no exchange of tangible goods. - An invisible trade involves the transfer of non-tangible goods and/or services, such as customer service, intellectual property and patents.
14. How do tariffs interact with the idea of comparative advantage?
It works against the theory of comparative advantage.
21. What is a managed float system of currency exchange rates?
Managed Float System of Currency Exchange Rates: - Currency whose exchange rate is not determined by the free-market forces of demand & supply but is maintained at a certain level by the governments intervention through a central bank. - Established by the Louvre Accord in 1987, it allows the G-7 countries to jointly intervene in the exchange market to correct over- or undervaluation of currencies.
When did the trade and tariff actions begin between the U.S. and China?
March 23rd, 2018: 1) US imposes a 25% tariff on all steel imports 2) US imposes a 10% tariff on all aluminum imports
Do all European Union members use the Euro?
No, not all members of the EU use the Euro as their currency.
32. What is diffuse ownership?
Ownership that is spread out among many shareholders.
33. How can debt help with the agency problem?
Payments can motivate managers to curb private benefits & wasteful investments.
43. What is a spot rate quotation?
Spot rate currency quotations can be stated in direct or indirect terms.
19. Under the Bretton Woods System, what currency was pegged to the value of gold?
The US Dollar held as gold. (Gold-Exchange System)
1. What are the 3 major dimensions that set international finance apart from domestic finance?
Three major dimensions set international finance apart from domestic finance. They are: 1. Foreign exchange and political risks. 2. Market imperfections. 3. Expanded opportunity set.
26. What is a trade deficit in simple terms?
When the country buys (Importing) more foreign goods than selling (Exporting) domestic goods
