mgt 302 exam 2
Antidumping Policies
designed to punish foreign firms that engage in dumping and thus protect domestic producers from unfair foreign competition
when a government intervenes in the currency market to limit volatility of its currency exchange rate
dirty-float
The _____ helps us to compare the relative prices of goods and services in different countries.
exchange rate
The rate at which one currency is converted into another is known as the _____.
exchange rate
quota rent
extra profit producers make when supply is artificially limited by an import quota
A pegged exchange rate means the value of a currency is flexible against a set of currencies.
false
a currency board would look to ___ exchange rate when converting currency.
fixed
the european monetary system relied on a ___ exchange rate system prior to the introduction of the euro
fixed
A --- exchange rate is advocated as having the ability to help a country out of an economic crisis
floating
monetary policy autonomy and trade balance adjustments are elements that tend to support ___ exchange rates
floating
portugal experienced a --- in 2010 when it couldn't pay back its foreign debt.
foreign debt crisis
The _____ is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems.
foreign exchange market
The risk that arises from volatile changes in exchange rates is known as _____.
foreign exchange risk
When two parties agree to exchange currency and execute the deal at some specific time in the future, a _____ occurs.
forward exchange
A(n) _____ is quoted for 30 days, 90 days, and 180 days into the future.
forward exchange rate
Differences in the spot exchange rate and the 30-day forward rate are normal and reflect the expectations of the foreign exchange market about:
future currency movements
governments trying currencies to gold and guaranteeing convertibility to gold is known as the
gold standard
Advocates of the free float system state that all of the following support this kind of international exchange Except
governments can not expand their monetary supplies leading to inflation
lack of accountability
has become too powerful for an institution that lacks any real mechanism for accountability
When a firm insures itself against foreign exchange risk, it is engaging in
hedging
the use of currency management instruments such as swaps and the forward market have ___ since 1973.
increased
international monetary system
institutional arrangements that govern exchange rates
A managed float is the exchange rate policy where the government
intervenes in the exchange rate system only in a limited way.
the US raised the dollar price of gold by nearly $15 an ounce in 1934. By doing so, this implied that the dollar was worthrtoc
less
contracting out manufacturing in an effort to build strategic flexibility is best suited for ___ value-added manufacturinga
low
IMF has repeatedly lent money to nations experiencing financial crises in return for
macroeconomic policy implementation
the unpredictability of exchange rate movements in the post-bretton woods era has led to which of the following
made international business planing difficult, added risk to exporting and importing, increased foreign trade opportunities
The idea that each country should be allowed to choose its own inflation rate is called the ________ argument.
monetary autonomy
three main elements supporting a floating exchange rate
monetary policy, automatic trade balance adjustments, and economic recovery
Which economic trade theory from chapter 6 best connects with Alex Tabborock's TED talk premise that innovation is driving growth?
new trade theory
forward exchange rate
occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. For most major currencies, forward exchange rates are quoted for 30 days, 90 days, and 180 days into the future
Nicaragua bases the valuation of its currency on the U.S. dollar. The value of Nicaragua's currency is changed based on the changes in the value of the dollar. This is an example of a ________ exchange rate system.
pegged
Banking Crisis
refers to a loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits. (Ireland 2008)
Jamaica Agreement
revised the IMF's articles of agreement to reflect the new reality of floating exchange rates.
Currency _____ typically involves the buying and selling of funds from one currency to another in the hopes of profiting from shifts in exchange rates.
speculation
Currency _____ typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.
speculation
dvocates of a fixed exchange rate regime argue that such a system will limit the destabilizing effects of
speculation
When a tourist goes to a bank in a foreign country to convert money into the local currency, the exchange rate used is the _____.
spot rate
managed float system
system under which some currencies are allowed to float freely, but the majority are either managed by government intervention or pegged to another currency
Gold Par Value
the amount of currency needed to purchase one ounce of gold
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 (long-term)
Transaction Exposure
the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values (short-term)
IMF-mandated macro economic policies are under serious debate, with critics charging that at times the IMF imposes inappropriate conditions on developing nations.
One size fits all approach to macro economic policy that may be inappropriate for many countries Moral hazard - people behave recklessly because they know that will be saved if things go wrong Lack of accountability - has become too powerful for an institution that lacks any real mechanism for accountability
Fixed exchange rate regime
1) The need to maintain a fixed exchange rate imposes monetary discipline on a country 2) Floating exchange rate regimes are vulnerable to speculative pressure 3) Uncertainty that accompanies floating exchange rates dampens the growth of international trade and investment 4) Far from correcting trade imbalances, depreciating a currency on the foreign exchange market tends to cause price inflation
Fixed exchange rate regime imposes discipline in two ways:
1. The need to maintain a fixed exchange rate puts a brake on competitive devaluations and brings stability to the world trade environment 2. A fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation
administrative trade policies
: Bureaucracy rules typically adopted by government, that can be used to restrict imports or boost exports.
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. (mexican pesos)
voluntary export restraint
A quota on trade imposed from the exporting country's side, instead of the importer's; usually imposed at the request of the importing country's government.
local content requirement
A requirement that some specific fraction of a good be produced domestically.
Dirty Float System
A system under which a country's currency is nominally allowed to float freely against other currencies, but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value.
floating exchange rate
A system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand.
Moral Hazard
Arises when people behave recklessly because they know they will be saved if things go wrong
Corporate-government relations
As major players in the international trade and investment environment, businesses can influence government policy toward the international monetary system. For example, intense government lobbying by U.S. exporters helped convince the U.S. government that intervention in the foreign exchange market was necessary.
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 payables if that currency is expected to depreciate.
European Monetary System
EU system designed to create a zone of monetary stability in Europe, control inflation, and coordinate exchange rate policies of EU countries.
Currency Crisis
Occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate. (Mexican Peso crisis
Gold Standard
Pegging currencies to gold and guaranteeing convertibility
Dumping
Selling goods in another country below market prices
Foreign Debt Crisis
Situation in which a country cannot service its foreign debt obligations, whether private-sector or government debt (greece 2010)
Currency management
The current system is a mixed system in which a combination of government intervention and speculative activity can drive the foreign exchange market. Companies engaged in significant foreign exchange activities need to be aware of this and to adjust their foreign exchange transactions accordingly.
Translation Exposure
The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values. (3 moths/year)
The foreign exchange market serves two main functions
The first is to convert the currency of one country into the currency of another. The second is to provide some insurance against foreign exchange risk, or the adverse consequences of unpredictable changes in exchange rates."
Business Strategy
The volatility of the current global exchange rate regime presents a conundrum for international businesses. Exchange rate movements are difficult to predict, and yet their movement can have a major impact on a business's competitive position.
What are three reasons why the dollar became less attractive to foreign investments in 2002
US budget deficits increased US government officials "talking down" the dollar US slowdown in economic activity
Crisis Recovery
When a country is hit by a severe economic crisis, its currency typically declines on foreign exchange markets. The reason for this is that investors respond to the crisis by taking their money out of the country, selling the local currency, and driving down its value.
One criticism is that the IMF's traditional policy prescriptions represent
a "one-size-fits-all" approach to macroeconomic policy that is inappropriate for many countries
Carry Trade
a kind of speculation that 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
criticism of the IMF is that it lacks -- because there is no body that oversees its actions and decisions
accountability
countervailing duties
antidumping duties
As the volume of international trade expanded in the wake of the Industrial Revolution:
arrange payment in paper currency and for government to agree to convert the paper currency into gold on demand at a fixed rate
Since the 1970s, developed countries like Great Britain and the US have tended to finance their deficits by
borrowing private money
tactics to help firms minimize their translation and transaction exposure.
buying swaps entering into foreign exchange rates lead strategy lag strategy
According to Didier Sornette, people are able to predict financial crises by doing the following:
by evaluating date and looking for extreme outliers, by looking for dragon-kings, listening and looking for 'excesses' which 'sing' when stressed
Which of the following 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
US dollar and Japanese yen are free to float against each other. This means the exchange rates ___ fluctuate.
constantly
foreign exchange rates have been more volatile since 1973 due to the many ___ that have occurred in this period
crises
A(n) _____ is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.
currency swap
pegged exchange rate
currency value is fixed relative to a reference currency
during a currency crisis, the value of a country's currency
depreciates
Arbitrage
the purchase of securities in one market for immediate resale in another to profit from a price discrepancy
fixed exchange rate
the values of a set of currencies are fixed against each other at some mutually agreed-on exchange rate
International businesses use foreign exchange markets for many reasons. Which of the following is one of these reasons?
to invest for short terms in money markets when they have spare cash
Speculative buying and selling of currencies can create volatile movements in exchange rates under the present foreign exchange system.
true
The Infant industry argument suggests that governments should protect new industries within their countries until that are competitively viable and was proposed by Alexander Hamilton in 1792.
true
The primary role of the International Monetary Fund is to maintain the international monetary system by controlling price inflation and imposing monetary discipline.
true
The primary role of the World Bank is the eradication of poverty.
true
when countries began to devalue their currencies at will, confidence in the gold standard lessened
true
fixed exchange system reduces
uncertainty
nonconvertible currency
when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency (Brazil, Colombia, China)
balance-of-trade equilibrium
when the income its residents earn from exports is equal to the money its residents pay to other countries for imports (the current account of its balance of payments is in balance).
banking crisis
Great depression: many took money out of banks and hid it at home instead
infant industry argument
New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations.
Externally Convertible Currency
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. (Russia)
Oil crisis of 1971:
OPEC quadrupled the price of oil
