Ch 10 International Business
An American tourist in Japan is interested in buying a souvenir that costs 1800 yen. How much is this in dollars if the exchange rate is $1 to Y400.
$4.50
If the interest rate in country A is 8% and the interest rate in country B is 4%, the international Fisher effect predicts the value of country A's currency will depreciate by ______ against country B's currency.
4%
The five most important foreign exchange trading centers in terms of level of activity are
London, New York, Zurich, Tokyo and Singapore.
If the demand for the yen outstrips its availability and if the supply of the dollar outweighs the demand, the yen will-------(appreciate or depreciate?) against the dollar.
appreciate
A lag strategy occurs when a firm attempts to delay the collection of foreign currency receivables when a currency is expected to ______ and delay foreign currency payables when a currency is expected to ______.
appreciate; depreciate
Buying a currency low and immediately selling it high to make a profit from the price discrepancy is called _____.
arbitrage
The New York yen/dollar exchange rate was Y125=$1. Through ______, a dealer can make a profit on this currency transaction by buying it low and selling it high.
arbitrage
According to the Fisher effect, if the real interest rate in country #1 is 8% and it is 5% in country #2, an investor would take advantage of this by
borrowing from #2 and investing in #1.
It would be difficult to profit through arbitrage because the ______ for a currency would increase when dealers try to profit from exchange rate discrepancies leading to ______ of that currency, and the price differential would disappear.
demand; appreciation
In the foreign exchange market, it is _____ to profit through arbitrage.
difficult
What is the key way a company can reduce economic exposure?
distribute production facilities and assets to various locations
Most foreign exchange transactions involve the _____ on one side.
dollar
While many companies focus on reducing transaction and translation exposure when managing foreign exchange risk, very few companies pay attention to
economic exposure
If the foreign exchange market is _____, forward exchange rates should be _____ predictors of future spot rates.
efficient; unbiased
The extent to which income from individual transactions is affected by fluctuations in foreign exchange values is known as transaction ______.
exposure
A policy of ______ convertibility is in place in some countries and places restrictions on residents' ability to convert domestic currency into a foreign currency.
external
Tonya was surprised to learn that her country limited the amount of currency she could convert to US dollars when she went to America to visit her cousin. This limit is an example of a policy of
external convertibility.
Able Appliances needs to convert the pounds it earns from selling products in Great Britain to dollars. What mechanism allows the company to make this conversion?
foreign exchange market
Some country's governments do not put any limits on the purchase of foreign currency for residents and nonresidents. These country's have a _____ currency.
freely convertible
In an efficient market, prices are said to
fully reflect all available information.
Forward exchange rates are exchange rates that govern _____ transactions.
future
The ______ market school believes that forward exchange rates are NOT the best predictors of future spot exchange rates.
inefficient
What are the two schools of thought regarding the prediction of future exchange rates?
inefficient market school efficient market school
When a country's money supply grows faster than the output of goods and services, this causes
inflation
A swap deal is just like a conventional forward deal in that it
insures against foreign exchange risk.
If the spot exchange rate is $1 to 110 yen and the 90-day forward rate is $1 to 100 yen, then the yen is selling at a ______ to the dollar in the 90-day forward market.
premium
When $1 buys more lira with a forward exchange than with a spot exchange, it is said that the dollar is selling at a _____ on the 30-day forward market.
premium
Foreign exchange markets can provide some insurance against volatile changes in exchange rates, which is called foreign exchange------
risk
Currency ______ involves buying, selling, and holding currencies in order to make a profit from favorable fluctuations in exchange rates.
speculation
The effect of currency exchange rate changes on the reported financial statements of companies is called ______ exposure.
translation
If a basket of goods costs $400 in the US and 40,000 yen in Japan, PPP theory predicts that the dollar/yen exchange rate should be
$.01 per Japanese yen.
If the exchange rate is 1 British pound to $1.35, an American in London will need ______ to purchase a purse priced at 20 pounds.
$27
_____ typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.
Currency speculation
In theory, if a country's price inflation is rising rapidly, it should expect to see its currency--------- against that of countries in which inflation rates are lower. (Choose between appreciate or depreciate.)
Depreciate
_____ exposure involves the present measurement of past events using currency exchange rate changes on a company's financial statements.
Translation
Expectations becoming a self-fulfilling prophecy when currency traders move in the same direction at the same time is called the ______ effect.
bandwagon
Residents of the hypothetical nation of Jarna feared that the country's economy was failing. They rushed to convert their domestic currency into US dollars and investors in businesses in Jarna also converted their financial holdings. This mass conversion of currency is known as _____.
capital flight
Tyson is a trader and borrows money in Japanese yen (where the interest rate is 1%). He then invests the money in a Canadian bank, where the rate is 5%. This is an example of a(n) ______.
carry trade
To protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies, firms should aim for--------control of exposure. (Choose centralized or decentralized.)
centralized
Economic exposure is concerned with the affect of ______ on a firm's international earning power.
changes in exchange rates
Jameson Electric Corp. would use the foreign exchange market when it needs to
convert currency.
When a country's currency is nonconvertible, a company may engage in ______, where goods and services will be traded for other goods and services.
countertrade
When General Electric won a contract for a $150 million generator project in Romania, it agreed to take payment in the form of Romanian goods that could be sold for $150 million on international markets. This is an example of
countertrade.
A foreign exchange market is where one country's ______ is converted into that of another country.
currency
An investment made to profit from future currency movements is called
currency speculation.
Feldman Technology Group has international holdings in India. The company often needs to fund large orders for parts in India with the knowledge that an Indian importer will soon buy completed product from Feldman. These transactions require large sums of capital in both dollars and rupee and as a way to move from one currency to another without incurring foreign exchange risk, the company should use a(n) _____.
currency swap
The bandwagon effect occurs in investing when
currency traders move as a group in the same direction at the same time.
A lead strategy occurs when a firm attempts to collect foreign currency receivables early when a currency is expected to ______ and pay foreign currency payables before they are due when a currency is expected to ______.
depreciate; appreciate
In a forward exchange transaction, $1 buys more lira with a spot exchange than with a 30-day forward exchange. When this occurred, it is said that the dollar is selling at a _____ on the 30-day forward market.
discount
When a dominant enterprise is able to set different prices in different markets to reflect varying demand conditions, it is practicing price ______.
discrimination
Company A is based in Europe and does a large amount of business in the US. The company fears that the euro will gain in strength against the dollar, so it sets up a local production facility in the United States. This is a way to reduce ______ exposure.
economic
The extent to which a firm's future international earning power will be affected by exchange rate changes is called ______ exposure.
economic
A tactic that reduces translation and economic exposure is
entering into forward exchange rate contracts.
When only nonresidents can convert a currency into a foreign currency with no limitations, the currency is considered
externally convertible.
The volatile changes in exchange rates that can negatively affect an international business are commonly referred to as
foreign exchange risk.
The efficient market school believes that the foreign exchange market is efficient at setting ______ exchange rates.
forward
Which approach to forecasting draws on economic theory to develop models that predict exchange rate movements?
fundamental
The chief financial officer of Linwell Corp. is concerned that since he can't predict changes in future exchange rates, there could be adverse consequences for the firm. One way the company can insure itself against this possibility is by engaging in _____.
hedging
Which school of thought on exchange rate forecasting does NOT believe that forward exchange rates are the best predictors of future spot exchange rates?
inefficient
A(n) ______ is based on the theory that prices don't reveal all available information and more is needed to predict future spot exchange rates.
inefficient market
In the context of the Fisher Effect, different interest rates in Argentina and Italy reflect differing expectations about ______ between those countries.
inflation rates
The Fisher effect predicts that there is a strong relationship between ______ and interest rates.
inflation rates
A business is using hedging when it
insures itself against foreign exchange risk.
According to the international Fisher effect, there is a relationship between spot exchange rates and _____ between countries.
interest rates
One main reason why the IFE is NOT good at explaining short-term exchange rate movements is the impact of ______ in determining the expectations of market traders.
investor psychology
Two strategies that can be used to reduce translation and transaction exposure are: (Check all that apply.)
lead strategy lag strategy
According to research, PPP theory is a relatively good predictor of ______ exchange rate movements, but is not as good a predictor of ______ movements.
long-run; short-run
The law of ______ is the economic theory that the price of a given security, asset, or commodity must have the same price when exchange rates are taken into consideration.
one price
The international Fisher effect states that for any two countries, the spot exchange rate should change in an equal amount, in the _____ direction to the difference in nominal interest rates between the two countries.
opposite
When the growth in a country's money supply is faster than the growth in its output of goods, ______ tends to increase.
price inflation
The impact of psychological factors and investor expectations make it difficult for exchange rate theories to predict ______ changes in exchange rates.
short-term
A(n) ______ exchange rate is the price to exchange one currency for another for immediate delivery.
spot
The Fisher effect equates the nominal interest rate as
the required real interest rate + expected rate of inflation.
At the simplest of levels, exchange rates are determined by _____.
the supply and demand of currencies
Capital flight is most likely to occur when
the value of domestic currency is rapidly depreciating.
Suppose a US company agrees to buy products worth 1 million euros. At the time of the agreement, the dollar/euro exchange rate was $1 = €1.10, but at the time of payment, the exchange rate is $1 = €0.80. The additional money owed by the US company due the adverse movement in exchange rates between the time of the deal and the time when payment is due is called ______ exposure.
transaction
When a government intervenes in cross-border trade by implementing a trade barrier, it ______ the link between relative price changes and changes in exchange rates predicted by PPP theory.
weakens
If an American firm has a subsidiary in the EU and the value of the euro depreciates rapidly against the value of the dollar over a year, you would see a reduction in the dollar value of the euro profit made by the European subsidiary. This would result in------ translation exposure. (Choose positive or negative.)
negative
Countertrade is a logical choice when a country's currency is
nonconvertible.
When neither residents nor nonresidents are allowed to convert a currency to a foreign currency, the currency is considered
nonconvertible.
What is hyperinflation?
An explosive and seemingly uncontrollable price inflation in which money loses value very rapidly
If the interest rate in Canada is 6.5% and the interest rate in the US is 4%, the international Fisher effect predicts that
Canada's currency will depreciate by 2.5% against the US dollar.
Which type of control of exposure is MOST effective at protecting resources efficiently and ensuring that each subunit adopts the correct mix of tactics and strategies?
Centralized
______ agreements are barter-like agreements used by companies in countries whose currency is nonconvertible.
Countertrade
PPP theory, according to research, seems to predict exchange rate movements best for countries in which two situations? (Check all that apply.)
Countries with high inflation rates. Countries with underdeveloped capital markets
What causes inflation to occur in a country?
Inflation occurs when the money supply in a country outpaces the level of production of goods and services.
Identical products sold in different countries must sell for the same price in competitive markets when their price is expressed in terms of the same currency. This is called the law of ------
One Price
What are three moderately decent predictors of long-term changes in exchange rates? (Check all that apply.)
Relative inflation rates Nominal interest rate differentials Relative monetary growth
______ analysis is based on the premise that there are analyzable market trends and that these past trends can be used to predict future trends.
Technical
Borrowing in a currency from a country with low interest rates and then investing in another currency where interest rates are high is called ______.
a carry trade
Economic exposure is concerned with the------term effect of changes in exchange rates on future prices, sales, and costs. (Choose short or long.)
long
The text suggests that as a way to take control of exchange rate risk, firms should produce _____ foreign exchange reports.
monthly
The Economist magazine version of the PPP uses ______ as a proxy for a "basket of goods."
the Big Mac
The failure to find a link between which two conditions has been referred to as the purchasing power parity puzzle? (Check all that apply.)
Inflation rates Exchange rates
A(n) -------- (lead or lag?) strategy is when a firm attempts to collect foreign currency receivables early when a currency is expected to depreciate and pay foreign currency payables before they are due when a currency is expected to appreciate.
Lead
The most important foreign exchange trading center is ______ with 37% of the activity.
London
Which approach to forecasting uses past trends of prices and volume data to predict the future?
Technical analysis
Suppose a company agrees to buy products in 2014 with payment due in 2015. ______ exposure refers to money lost due to an adverse movement in exchange rates between the time the deal is signed and the time when the products are paid for.
Transaction
According to PPP theory, a country with a high inflation rate will see ______ in its currency exchange rate.
a depreciation