Chp 1 Globalization, Ch. 2 International Monetary System, Ch. 3 Balance of Payments, Chp 5 EX market

What was the Bretton Woods System,

A system where only the USD was pegged to gold, and all the other currencies were fixed at some exchange rate relative to the USD. Countries kept large reserves of USD and their own currencies rather than large reserves of gold. It addressed the previous problem of limited monetary reserves seen during the Gold Standard.

The USD EXPORTS iphones, and IMPORTS shoes Appreciation of a country's currency raises Will the Price of EXPORTS go up or down will the Price of IMPORTS go up or down

All else equal, an appreciation of a country's currency raises the relative prices of exports and lowers the relative price of its imports Exports = Selling - raises selling prices Imports = Buying - lowers buying prices When the USD appreciates, the price of selling iphones goes UP (relative) - Exports prices increase The price of buying, the price to BUY or IMPORT shoes goes down, imports price decrease When a FOREIGN currency APPRECIATES that is bad for you. That means that their product prices will increase, and that they will buy YOUR goods at a lower price

State the order of the monetary system

Bi, Gold, War, Woods, Flex Bimetallism: Classical Gold Standard: Interwar Period: Bretton Woods System: Flexible Exchange Rate System:

Put the following in correct date order: Jamaica Agreement, Bretton Woods Agreement, Smithsonian Agreement. Smithsonian Agreement, Bretton Woods Agreement, Jamaica Agreement. Bretton Woods Agreement, Smithsonian Agreement, Jamaica Agreement. Bretton Woods Agreement, Jamaica Agreement, Smithsonian Agreement.

Bretton Woods Agreement, Smithsonian Agreement, Jamaica Agreement.

Prior to World War I ending, the dominant global currency was the German mark. French franc. Japanese yen. British pound.

British pound.

Match the current account category with the appropriate transaction: Unilateral transfers Match with: The export of computers Tourist expenditures Dividends paid by a company to foreigners Foreign aid

Foreign aid

How does international finance differ from purely domestic finance? (4)

Foreign exchange risk political risk Expanded opportunity set Market imperfections

What are the Pros of Flexible Exchange Rate (2)

Low maintenance - don't have to change exchange rates >>Gives government economic flexibility to respond Independence from economic conditions

Cross Rate (USD/AUD = .60) (MXN/USD = 10.70) Find the cross rate between MXN/AUD

MXN/AUD = USD/AUD * MXN/USD 0.60 * 10.70 = 6.42 6.42 pesos per AUD Multiply when USD is NOT in the base

What was the NAFTA?

NAFTA created a large free-trade zone reducing or eliminating tariffs on imports and exports between the U.S, Mexico, and Canada Result: there was an increase in trade between the three countries, and real per-capita GDP also increased slightly.

What are the Pros of Fixed Exchange Rate (2)

NO foreign exchange risk (if peg stays) Reduced volatility can facilitate international trade

What is the balance of payments? Why is a country's balance of payments data useful? What information about a country can be learned from it?

What: Its record of a country's transactions with the world over a period of time Why: Shows country's financial flows, shows the Supply and demand of currencies, What info: countries' competitiveness

Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $5 = £1. What would an ounce of gold be worth in U.S. dollars? Multiple Choice $29.40 $30.00 $0.83 $1.20

$30.00 £6 = 1 oz of gold = ($5 * £6)

Practice Triangular Arbitrage

((A * B) * D) / C A investment B j/$ C k/$ D k/j

The exchange rate for Philippine pesos per 1 USD is 54.53. The exchange rate for Thai baht per 1 USD is 33.73. What is the implied cross-exchange rate for Thai baht per 1 Philippine peso? So 1 USD = 54.33 Pesos 1 USD = 33.73 bahts - Find the 1 Peso = ____ Bahts?

1. Convert to common currency 1 / X 1/54.33 = $0.0183 1/33.73 = $0.0296 - 2. Identify the least valuable currency 3. Divide to get an answer less than 1 0.0183/0.0296 = 0.618 It's impossible that 1 Peso could buy more than 1 Baht because the Peso is less valuable. So that should hint to us that our first answer, 0.618, was the right one.

Ecuador does not have its own national currency, circulating the U.S. dollar instead. About how many countries do not have their own national currency? Multiple Choice 10 20 30 40

40

The spot exchange rate between the Swiss franc (CHF) and the USD is CHF/USD = 1.7799, (This means 1 CHF = 1.7799 USD) and the spot exchange rate between the New Zealand (NZD) and the USD is NZD/USD = 2.2529 (1 NZD = 2.2529 USD) Calculate the CHF/NZD spot rate

CHF/NZD =(CHF/USD) / (NZD/USD) =1.7799 / 2.2529 = .79 CHF/NZD = .79 Divide because USD is the base of both quotes because if you had done it wrong, you'd get 2.2529/1.7799 = 1.27 Making the CHF = 1, and the NZD = 1.27. Making the CHF worth LESS than the NZD which tells you it is wrong

Which statements about the euro zone are correct? No countries have been added to the euro zone since its introduction. Only countries in the European Union are in the euro zone. All countries in the European Union are in the euro zone.

CORRECT: Only countries in the European Union are in the euro zone. Reason: The euro zone is defined as the EU member states that have adopted the euro. Not All countries in the European Union are in the euro zone. Countries such as Sweden are in the EU but have not adopted the euro.

What is cultural risk?

Cultural risk refers to the potential for a company's operations in a country to struggle because of differences in language, customs, norms, and customer preferences

True or False: Today most currencies now have fixed exchange rates

False, they are mostly floating exchange rates

When a currency is trading at a premium to the dollar in American terms in the forward market, the dollar is usually expected to ___________________ in value Increase Decrease Not change None of these are correct

Decrease

What is a trade deficit? And how is it increased or reduced?

Deficit: when cash outflows FROM a country are greater than the cash inflows When the US spends more than it Sells When a country imports more than it exports. when is buying more than its selling Increase deficit: keep importing Decrease deficit: export more and import less

Match the current account category with the appropriate transaction: Factor income Match with: The export of computers Tourist expenditures Dividends paid by a company to foreigners Foreign aid

Dividends paid by a company to foreigners

Why did the Bretton Woods system end?

First came the Smithsonian Agreement then... It ended with the Jamaica Agreement to allow for a more flexible exchange rate system.

Motivations for expanding internationally? (2)

Expanding internationally can: Increase revenues (by selling in new markets) Decrease costs (by finding cheaper labor or production - economies of scale)

What are the Cons of Fixed Exchange Rate (3)

Government responses restricted when responding to economic crises A financial crisis can ensue If currency become un-pegged. (ex. Thailand) They have to maintain exchange rate

Using the spot and outright forward quotes in the table below, determine the corresponding bid-ask spreads in points. Spot 1.3494 − 1.3508 One-Month 1.3504 − 1.3523 Three-Month 1.3520 − 1.3544 Six-Month 1.3560 − 1.3590

IN POINTS 14, 19, 24, 30 Bid-Ask Spreads are calculated by subtracting the Bid Price from the Ask price. Report in Points by moving decimal over 3 positions

When a currency depreciation causes the trade balance first to deteriorate then improve, it is referred to as the ______.

J-curve effect

What are the Cons of Flexible Exchange Rate (2)

Local economic challenges can be compounded (no freeriding) Greater foreign exchange RISK

What are advantages of flexible exchange rates relative to fixed exchange rates? (pick 2) Less exchange rate uncertainty National policy autonomy Easier external adjustments Lower transaction costs

National policy autonomy Easier external adjustments

A foreign exchange trader with a U.S. bank took a short position of £5,000,000 when the $/£ exchange rate was 1.26. Subsequently, the exchange rate has changed to 1.31. Is this movement in the exchange rate good from the point of view of the position taken by the trader? By how much has the bank's liability changed because of the change in exchange rate?

No, He will have to spend $0.05 per pound to get back to his original position Liability = 0.05 * 5,000,000 The increase in the $/£ exchange rate implies that the pound has appreciated with respect to the dollar. This is unfavorable to the trader since the trader has a short position in pounds.

What was the Jamaica Agreement?

flexible exchange rates were accepted and gold was abandoned as an international reserve asset.

Which country is not using the euro? Multiple Choice Greece Italy Sweden Portugal

Sweden

What is the automatic balance-of-payments adjustment under the gold standard known as? Multiple choice question. The Triffin Paradox Ricardo's comparative advantage The Price-Specie-Flow Mechanism Gresham's Law

The Price-Specie-Flow Mechanism

Does the US have a current account surplus or deficit? Does the US have a financial account surplus or deficit?

The US has current account deficit - buying a ton of goods and services But Financial Account Surplus - Selling a ton of stocks, securities, a ton of foreign purchases of US assets

Information about which of the following can potentially be learned from a country's balance of payments accounts?

The country's international competitiveness The supply and demand for the country's currency The country's openness to trade

Which of the following accounts for the export and import of goods and services? Multiple choice question. The current account The official reserve account The financial account The capital account

The current account

Match the current account category with the appropriate transaction: Merchandise trade Match with: The export of computers Tourist expenditures Dividends paid by a company to foreigners Foreign aid

The export of computers

Match the current account category with the appropriate transaction: Services Match with: The export of computers Tourist expenditures Dividends paid by a company to foreigners Foreign aid

Tourist expenditures

True or false: Capital transfers involve change of ownership or acquisition or disposal of an asset. True False

True Reason: Capital transfers involve change of ownership or acquisition or disposal of an asset

True or false: It is often difficult to associate a product with a single country of origin.

True Reason: The origin of inputs to a final good and its assembly are now often in different countries.

Under what period did the World Bank develop? Bimetallism: Classical Gold Standard: Interwar Period: Bretton Woods System: Flexible Exchange Rate System:

Under the Bretton Woods System (1940-70s)

If you sell, or go short: If you are selling EUR for USD (EUR/USD) which currency are you 'long', and which currency are you 'short'

You are Short EUR and Long USD You are LONG in what you purchased and SHORT in what you sold

If you buy, or go long: If you are buying EUR with USD (EUR/USD) which currency are you 'long', and which currency are you 'short'

You are long EUR and short USD You are LONG in what you purchased and SHORT in what you sold

The emergence of global financial markets is due in no small part to advances in computer and telecommunications technology. enforcement of the Soviet system of state ownership of resources of production. government regulation and protection of infant industries. none of the options

advances in computer and telecommunications technology.

Advantages of a flexible exchange rate include which of the following? National policy autonomy. Easier external adjustments. The government can use monetary and fiscal policies to pursue whatever economic goals it chooses. all of the options

all of the options

Deregulation of world financial markets provided a natural environment for financial innovations, like currency futures and options. has promoted competition among market participants. has encouraged developing countries such as Chile, Mexico, and Korea to liberalize by allowing foreigners to directly invest in their financial markets. all of the options

all of the options

MNCs can use their global presence to take advantage of underpriced labor services available in certain developing countries. gain access to special R&D capabilities residing in advanced foreign counties. boost profit margins and create shareholder value. all of the options

all of the options

The statistical record of a country's international transactions over a certain period of time presented in the form of double-entry bookkeeping is defined as the ______.

balance of payments

Currency market-makers buy at the ______ price and sell at the ______ ______ price. Multiple choice question. bid; higher ask bid; lower ask ask; lower bid ask; higher bid

bid; higher ask

In the long run, ______ tend to be responsive to a depreciation, exerting ______ influences on the trade balance. Multiple choice question. both exports and imports; positive imports but not exports; mixed neither exports nor imports; negative exports but not imports; mixed

both exports and imports; positive

An example(s) of a political risk is expropriation of assets. adverse change in tax rules. the opposition party being elected. both the expropriation of assets and adverse changes in tax rules are correct.

both the expropriation of assets and adverse changes in tax rules are correct.

Balance of payment entry capturing capital transfers and the cross-border acquisition and disposal of non-produced nonfinancial assets such as natural resources and marketing assets. current account financial account capital account resource account

capital account Not common, huge assets is where all international capital transfers are recorded.

Corporations today are operating in an environment in which exchange rate changes may adversely affect their competitive positions in the marketplace. This situation, in turn, makes it necessary for many firms to carefully manage their exchange risk exposure. carefully measure their exchange risk exposure. carefully manage and measure their exchange risk exposure. none of the options

carefully manage and measure their exchange risk exposure.

The theory of comparative advantage claims that economic well-being is enhanced if each country's citizens produce only a single product. claims that economic well-being is enhanced when all countries compare commodity prices after adjusting for exchange rate differences in order to standardize the prices charged all countries. claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production. claims that no country has an absolute advantage over another country in the production of any good or service.

claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production.

The structure of the foreign exchange market is an outgrowth of one of the primary functions of a(n) ______ banker: to assist clients in the conduct of international commerce. Multiple choice question. investment retail private commercial

commercial

Balance of payment entry representing the exports and imports of goods and services, and unilateral transfer. current account financial account capital account resource account

current account Do they have a deficit or surplus, what is the CURRENT status? is used to mark the inflow and outflow of goods and services into a country.

The USD EXPORTS iphones, and IMPORTS shoes Depreciation of a country's currency raises Will the Price of EXPORTS go up or down will the Price of IMPORTS go up or down

depreciation lowers the relative price of a country's exports and raises the relative price of its imports. Exports = Selling - lowers selling prices Imports = Buying - raises buying prices When the USD depreciates the exports price decrease the price of imports increase When a FOREIGN currency depreciates that is GOOD. That means that their products prices will decreases, and that you can sell your products to them for a higher price.

On January 1, 1999, an epochal event took place in the arena of international finance when all EU countries adopted a common currency called the euro. eight of 15 EU countries adopted a common currency called the euro. nine of 15 EU countries adopted a common currency called the euro. eleven of 15 EU countries adopted a common currency called the euro.

eleven of 15 EU countries adopted a common currency called the euro.

Balance of payment entry capturing all sales and purchases of financial assets, real estate, and businesses. current account financial account capital account resource account

financial account international monetary flows related to investment in business, real estate, bonds, and stocks are documented.

Broadly defined, the ______ market includes the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, trading in foreign currency options and futures contracts, and currency swaps. foreign exchange fixed income derivatives equity

foreign exchange

Following the introduction of the euro, the national central banks of the euro-12 nations disbanded. formed the EIB, which is analogous to the Federal Reserve System in the U.S. ceased to perform important functions in their jurisdictions. formed the ESCB, which is analogous to the Federal Reserve System in the U.S., and continue to perform important functions in their jurisdictions.

formed the ESCB, which is analogous to the Federal Reserve System in the U.S., and continue to perform important functions in their jurisdictions.

The World Trade Organization, WTO has the power to enforce the rules of international trade. covers agriculture and physical goods, but not services or intellectual property rights. recently expelled China for human rights violations. ruled that NAFTA is to be the model for world trade integration.

has the power to enforce the rules of international trade.

Exchange rates under the gold system were ______. Multiple choice question. highly unstable somewhat stable somewhat unstable highly stable

highly stable

A multinational firm can be defined as a firm that invests short-term cash inflows in more than one currency. has sales affiliates in several countries. is incorporated in more than one country. incorporated in one country and has production and sales operations in several other countries.

incorporated in one country and has production and sales operations in several other countries

The complex whole of agreements, rules, institutions, mechanisms, and policies regarding exchange rates, international payments, and the flow of capital is the ______. Multiple choice question. international monetary system international exchange system monetary exchange system

international monetary system

The process of using foreign currency reserves to buy one's own currency in order to decrease its supply and thus increase its value in the foreign exchange market, or alternatively, selling one's own currency for foreign currency in order to increase its supply and lower its price is referred to as ______. intervention speculation making a market arbitrage

intervention

The goal of shareholder wealth maximization is not appropriate for non-U.S. business firms. means that all business decisions and investments that a firm makes are done for the purpose of making the owners of the firm better off financially. is a sub-objective the firm should attempt to achieve after the objective of customer satisfaction is met. is in conflict with the privatization process taking place in third-world countries.

means that all business decisions and investments that a firm makes are done for the purpose of making the owners of the firm better off financially

The current account balance is exports ______ imports ______ unilateral transfers. plus; plus minus; minus plus, minus minus; plus

minus; plus unilateral transfers: are like gifts and are added

One would expect people who are more concerned about the inflationary tendencies of governments to be ______ supportive of the gold standard compared to those who are less concerned. Multiple choice question. more equally less

more They would tend to be more supportive since the money supply is limited by the scarcity of gold.

The term FN(j/k) refers to the price of ______. Multiple choice question. N units of currency k in terms of currency j for immediate (two-day) delivery one unit of currency k in terms of currency j for delivery in N months N units of currency j in terms of currency k for immediate (two-day) delivery one unit of currency j in terms of currency k for delivery in N months

one unit of currency k in terms of currency j for delivery in N months

Foreign exchange is traded in a(n) ______ market, not in a central marketplace where buyers and sellers congregate. derivative exchange-traded double auction over-the-counter

over-the-counter

If under the gold standard, one pound is supposed to trade for 2 francs and it is actually trading for 2.2 francs, then the pound is ______. overvalued fairly valued undervalued

overvalued Reason: It is overvalued because one pound can be turned into more francs than is supposed to be the case.

The owners of a business are the taxpayers. workers. suppliers. shareholders.

shareholders

A country's net foreign wealth is increased by a current account ______, which implies that the country used up ______ output than it produced. Multiple choice question. deficit; more surplus; more surplus; less deficit; less

surplus; less

What was the Smithsonian Agreement

the G-10 countries agreed to devalue the U.S. dollar against gold and most major currencies to save the Bretton Woods system.

The Bretton Woods agreement resulted in the creation of Multiple Choice the bancor as an international reserve asset. the World Bank. the Exim bank. the Federal Reserve Bank.

the World Bank.

A floating exchange rate is: involves the confirmation of the country authorities' de jure exchange rate arrangement. when a country formally pegs its currency at a fixed rate to another currency or basket of currencies where the basket reflects the geographic distribution of trade, services, or capital flows. where the exchange rate remains within a narrow margin of 2 percent relative to a statistically identified trend for six months or more, and the exchange rate arrangement cannot be considered as floating. where the exchange rate is largely market determined without an ascertainable or predictable path for the rate.

where the exchange rate is largely market determined without an ascertainable or predictable path for the rate.

Suppose that Great Britain is a major export market for your firm, a U.S.-based MNC. If the British pound depreciates against the U.S. dollar, your firm will be able to charge more in dollar terms while keeping pound prices stable. your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise. to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same. your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise, and to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same.

your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise, and to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same.