INTB 3080 Final Study Guide

13. Assume that the exchange rate between the euro and the dollar is € 1 = $1.20. A camera that retails for $300 in New York sells for € 200 in Berlin. Ignoring any transaction costs or barriers, this represents an initial arbitrage profit potential of: $60. $80. $20. $100.

$60. € 200 = $240 (€ 200 x 1.2). The difference of $60 ($300-$240) is the profit potential.

Recent developments CPTPP

(Comprehensive and Progressive Agreement for Trans Pacific Partnership) On 8 March 2018, Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Viet Nam signed the CPTPP in Santiago, Chile.

Custom union

-Eliminates trade barriers between member countries and adopts a common external trade policy -Most countries that enter a customs union desire further integration in the future -The Andean Community (between Bolivia, Columbia, Ecuador, and Peru)

Why has FDI increased?

-Firms still fear protectionist policies -Shift toward democratic political institutions and free market economies encourages FDI -Globalization is promoting firms to ensure they have a significant presence in many regions of the world. By limiting imports through quotas, governments increase the attractiveness of FDI and licensing.

Licensing Disadvantage

-Licensing could result in a firm's giving away valuable technological know-how to a potential foreign competitor -Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability -Licensing may be difficult if the firm's competitive advantage is not amenable to it

Common Market

-No barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production -Requires significant harmony among members in fiscal, monetary, and employment policies Mercosur (between Brazil, Argentina, Paraguay, and Uruguay) hopes to achieve this status

Objective of Single European Act?

-Remove all frontier controls between EC countries -Apply the principle of mutual recognition to product standards -Institute open procurement to non-national suppliers -Lift barriers to competition in retail banking and insurance -Remove all restrictions on foreign exchange transactions between member countries -Abolish restrictions on cabotage

Acquisition

-They are quicker to execute than greenfield investments -It is easier and less risky for a firm to acquire desired assets than build them from the ground up -Firms believe they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills

21 . What are some ways of building strategic flexibility and reducing economic exposure? Is this different for low value added ( surf gear) rather than high value added manufacturing ( airplanes).

...

Mercosur - pros and cons

1988: Argentina, Brazil. 1990: Paraguay, Uruguay 1995: Agreed to move toward a full customs union Trade quadrupled between 1990-1998 Has significant trade diversion issues Revival in 2003 by Brazil's president to be modeled after EU with common currency and elected parliament

Exchange Rate System

A fixed exchanged rate, sometimes called a pegged exchange rate, is a type of exchange rate regime where a currency's value is fixed against either the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold.

Free float

A floating exchange rate system exists where the foreign exchange market determines the relative value of a currency

Pegged float

A pegged exchange rate system exists when the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate

Fixed, pegged and floating exchange

A pegged exchange rate system exists when the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate A floating exchange rate system exists where the foreign exchange market determines the relative value of a currency

6. A firm has full outright stake in an acquisition when it acquires: A. at least 38 percent of a company. B. at least 60 percent of a company. C. at least 98 percent of a company. D. 100 percent of a company.

D. 100 percent of a company. Acquisitions can be a minority (where the foreign firm takes a 10 percent to 49 percent interest in the firm's voting stock), majority (foreign interest of 50 percent to 99 percent), or full outright stake (foreign interest of 100 percent).

9. Quebec's moratorium on fracking was supported by the public and it clearly did not violate NAFTA's investor clause True or False?

False. Quebec's moratorium on fracking was supported by the public and it clearly did violate NAFTA's investor clause which is why Lone Pine Resources was able to file the 250 million dollar suit in 2013 as we had discussed in class.

1. Economic union as a level of economic integration is the most integrated? True or false?

False. Several levels of economic integration are possible in theory. From least integrated to most integrated, they are a free trade area, a customs union, a common market, an economic union, and, finally, a full political union.

2. The country of Pabul and the country of Kimmurak have formed a free trade agreement. This has resulted in Pabul importing textiles from Kimmurak, which Pabul previously produced at a higher cost. This is an example of trade diversion. True/False?

False. This is trade creation

4. The European Community was established by the Maastricht Treaty. True/False

False. With the signing of the Treaty of Rome in 1957, the European Community (EC) was established.

Currency convertibility (external, freely and nonconvertible)

Freely convertible: both residents and non-residents can purchase unlimited amounts of foreign currency with the domestic currency Externally convertible: only non-residents can convert their holdings of domestic currency into a foreign currency Nonconvertible: both residents and non-residents are prohibited from converting their holdings of domestic currency into a foreign currency

Greenfield

Greenfield investments involve establishing new operation in a foreign country

Licensing Advantage

Helps a firm avoid making a direct foreign investment in a foreign country

Different types of FDI- advantages and disadvantages

Horizontal Direct Investment: FDI in the same industry abroad as company operates at home Vertical Direct Investment: Backward - investments into industry that provides inputs into a firm's domestic production (typically extractive industries) Forward - investment in an industry that utilizes the outputs from a firm's domestic production (typically sales and distribution) Advantages of FDI: FDI will be favored over exporting when: -Transportation costs are high -Trade barriers are high FDI will be favored over licensing when: -The firm wants control over its technological know-how -The firm wants control over its operations and business strategy -The firm's capabilities are not amenable to licensing .

Wal-Mart in Japan, what kind of FDI was it?

Horizontal FDI

8. Which of the following occurs when the quantity of money in circulation rises faster than the stock of goods and services? Liquidity crunch Deflation Trade surplus Inflation

Inflation

19. Which is the most important foreign exchange trading center in terms of percentage of activity? Zurich London New York Singapore

London

What is the drawback of adopting the Euro?

Membership implies a loss of control over monetary policy The EU is not an optimal currency area: an area where similarities in the underlying structure of economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro-economic policy

Was FDI governed by the GATT until the 1990's?

No. Until the 1990's there was no consistent involvement by multinational institutions in the governing of FDI. This changed with the formation in 1995 of the WTO, which has become involved in regulations governing FDI.

3. An industry composed of a limited number of large firms (i.e. an industry in which four firms control 80 percent of a domestic market) is referred to as a(n):

Oligopoly

13. In 1990, the MERCOSUR pact was expanded to include: (Find the answer) Mexico and Brazil. Peru and Brazil. Venezuela and Peru. Paraguay and Uruguay.

Paraguay and Uruguay.

Levels of economic integration

Political Union Economic Union Common Market Custom Union Free Trade Area

NAFTA - pros and cons

Pros: Enlarged and productive regional base Labor-intensive industries move to Mexico Mexico gets investment and employment Increased Mexican income to buy US/Canada goods Demand for goods increases jobs Consumers get lower prices Cons: Loss of jobs to Mexico Mexican firms have to compete against efficient US/Canada firms Losses in farming sector Migration to cities Mexican firms become more efficient Environmental degradation Loss of national sovereignty

1.Which of the following is transacted when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk? Swap Delivery Commercial paper Straddle

Swap

Who proposes EU legislation?

The European Commission

International Monetary Fund, why was it created, policies, assumptions, voting rights

The International Monetary Fund (IMF) is an organization of 188 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. The Role of the IMF Discipline A fixed exchange rate puts a brake on competitive devaluations and brings stability to the world trade environment A fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation Flexibility IMF ready to lend foreign currencies to members to tide them over during short periods of balance-of-payments deficits A country could devalue its currency by more than 10% with IMF approval

IMF Structural adjustments , austerity measures

The Role of the IMF Discipline A fixed exchange rate puts a brake on competitive devaluations and brings stability to the world trade environment A fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation Flexibility IMF ready to lend foreign currencies to members to tide them over during short periods of balance-of-payments deficits A country could devalue its currency by more than 10% with IMF approval

World Bank what is its purpose why was it created

The Role of the World Bank Under the IBRD scheme, money is raised through bond sales in the international capital market and borrowers pay what the bank calls a market rate of interest - the bank's cost of funds plus a margin for expenses. Under the International Development Agency scheme, loans go only to the poorest countries

17. Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following reflects the foreign exchange dealers' expectations about the dollar over the next 30 days? The dollar will depreciate against the euro. The dealers are undecided about the direction of movement. The dollar will appreciate against the euro. The dollar/euro exchange rate will be steady.

The dollar will appreciate against the euro.

What is a foreign exchange market

The foreign exchange market (FOREX) is a market for converting the currency of one country into that of another country

Bretton Woods Conference

The goal was to build an enduring economic order that would facilitate postwar economic growth The Bretton Woods Agreement established two multinational institutions The International Monetary Fund (IMF) to maintain order in the international monetary system The World Bank to promote general economic development

12. A U.S. company that imports laptop computers from Japan knows that in 30 days it must pay yen to a Japanese supplier when a shipment arrives. The company will pay the Japanese supplier ×150,000 for each computer, and the current dollar/yen spot exchange rate is $1 = ×110. The importer knows she can sell the computers the day they arrive for $1,600 each. However, the importer will not have the funds to pay the Japanese supplier until the computers have been sold. The importer enters into a 30-day forward exchange transaction with a foreign exchange dealer at $1 = ×105. Which of the following will happen if the exchange rate after 30 days is $1 = ×90? The importer will earn a profit of $236 per computer. The importer will earn a profit of $171 per computer. The importer will earn a profit of $65 per computer. The importer will incur a loss of $67 per computer.

The importer will incur a loss of $67 per computer.

4. Which of the following is a key feature of the foreign exchange market? The market never sleeps. The market is located in London. The market is characterized by high transaction costs. The market is shut for only three hours.

The market never sleeps.

2. Which of the following is a major reason why governments limit convertibility of their currency? To encourage foreign investments. To have a tight grip on fiscal policy. To maintain an illusion of growth. To preserve their foreign exchange reserves.

To preserve their foreign exchange reserves.

Why do governments limit convertibility of their currency?

To preserve their foreign exchange reserves. The main issue is whether or not some countries are using exchange rate policies to undermine free currency markets and whether they intentionally, in essence, devalue their currency to gain a trade advantage at the expense of other countries. A weaker currency makes exports inexpensive (or at least cheaper) to foreigners, which can lead to higher exports and job creation in the export sector.

10. In 2002-2007, the euro rose in value against the dollar. This boosted the dollar profits of American multinationals with significant operations in Europe. Which of the following is this an example of? Economic exposure Transaction exposure Translation exposure Income exposure

Translation exposure

Economic, translation and transaction exposure

Translation exposure Investments in subsidiaries in countries where the money is depreciating against the dollar, significantly reduces the value of your equity overseas , so the paper value on your balance sheet (debt/ equity ratio) changes, this could affect borrowing and access to capital markets Transaction exposure: Impact of Foreign Exchange rates on financial statements Economic exposure. Firms future earning power is affected by changing exchange rate movements.

5. The treaty of Maastricht committed EC members to adopting a common currency by January 1, 1999. True/False

True In February 1992, EC members signed the Maastricht Treaty, which committed them to adopting a common currency by January 1, 1999. The euro is now used by 19 of the 28 member states of the European Union; these 19 states are members of what is often referred to as the euro zone. It encompasses 330 million EU citizens and includes the powerful economies of Germany and France.

1. Under the free market view, countries should specialize in the production of those goods and services that they can produce most efficiently.

True The free market view argues that international production should be distributed among countries according to the theory of comparative advantage. Countries should specialize in the production of those goods and services that they can produce most efficiently.

7. When war broke out between Honduras and El Salvador, the Central American Common Market trade pact collapsed. Is this true?

True In the early 1960s, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua attempted to set up a Central American Common Market. It collapsed in 1969 when war broke out between Honduras and El Salvador after a riot at a soccer match between teams from the two countries.

3. Trade creation occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. It may also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area. True/false

True!

Exporting Disadvantage

When transportation costs are high, exporting can be unprofitable Low value-to-weight ratio

18. The theory of purchasing power parity (PPP) links changes in the exchange rate between two countries' currencies to: changes in the countries' price levels. changes in the countries' population. changes in the countries' political structure. changes in the countries' productivity levels.

changes in the countries' price levels.

9. The rapid rise in the value of the dollar on the foreign exchange market in the 1990s hurt the price competitiveness of many U.S. producers in world markets. U.S. manufacturers that relied heavily on exports saw their export volume and world market share decline. This is an example of: income exposure. transaction exposure. economic exposure. translation exposure.

economic exposure.

11. A currency is said to be _____ when only nonresidents may convert it into a foreign currency without any limitations. externally convertible nonconvertible part-convertible freely convertible

externally convertible

Licensing

granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit that the foreign entity sells

2. Walmarts move into Japan is considered to be

horizontal FDI

8. A critical competitive feature of oligopolistic industries is the _____ of the major players. lack of interaction collaboration cooperation

interdependence A critical competitive feature of oligopolistic industries is interdependence of the major players: What one firm does can have an immediate impact on the major competitors, forcing a response in kind.

Carry Trade

involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interest rates are high

Exporting

producing in the home country, then shipping the product to be sold; example: If 3M, am American firm produces adhesive tape in St. Paul, Minnesota, and ships the tape to South Korea to be sold.

Currency Speculation

short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

10. A regional free trade agreement will benefit the world only if: (Find the answer) - it raises the standard of living in one of the countries involved. - the amount of trade it creates exceeds the amount it diverts. - the currencies of nations involved in the agreement appreciates. - the balance of trade situation remains stable in the region.

the amount of trade it creates exceeds the amount it diverts.

Arbitration

the process of buying a currency low and selling it high

Spot Exchange

the rate at which a foreign exchange dealer converts one currency into another currency on a particular day

Currency swap

the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

What is FDI?

when a form invests directly in facilities to produce or market a product in a foreign country

12. Bolivia, Chile, Ecuador, Colombia, and Peru signed an agreement in 1969 to create the: (Find the answer) Andean Pact. Rim Pact. South American Group. FTAA.

Andean Pact.

5. Which of the following refers to the purchase of securities in one market for immediate resale in another to profit from a price discrepancy? Exercise Straddle Arbitrage Swap

Arbitrage

6. Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is $1 = $100Yen and that the yen/dollar exchange rate quoted in New York at the same time is $1 = 120. Which profit making situation exists here? Option Hedge Swap Arbitrage

Arbitrage

What was decided in the Jamaica agreement

At the Jamaica meeting, the IMF's Articles of Agreement were revised to reflect the new reality of floating exchange rates Floating rates were declared acceptable Gold was abandoned as a reserve asset Total annual IMF quotas - the amount member countries contribute to the IMF - were increased to $41 billion (today, this number is $767 billion)

14. You exchanged $1,000 to 105,000 yen for a trip to Japan. During your stay, you spent 50,000 yen. Also, during this period the dollar weakened against the yen to 100 to a dollar. On your return, you went to the bank to exchange the remaining yen. How many dollars did you spend on the trip? $550 $523 $450 $600

$450. The remaining 55,000 yen would yield 550 dollars when the exchange rate is 100 yens for a dollar. Amount spend during the trip is $450 ($1,000 - $550).

15. A French company has 20 million euros it wants to invest for three months. Investing in a Thai money market account gives the company a higher return than domestic investments. Is this investment risk-free? Why or why not? A. Yes, because money market investments are considered to be equivalent to bank deposits. B. No, because foreign currency movements in the intervening period can affect the profitability. C. Yes, because such investments also lock foreign exchange rates for the duration of the investments. D. No, because money markets instruments are considered to be the most speculative of all investments.

B. No, because foreign currency movements in the intervening period can affect the profitability. The rate of return it earns on this investment depends not only on the Thai interest rate, but also on the changes in the value of the Thai Baht against the euro in the intervening period.

Andean Pact.

Bolivia, Colombia, Ecuador, Peru, Venezuela Nearly failed. Rejuvenated in 1990 in the Galapagos Declaration Changed from FTA to customs union in 1992 Still has many political and economic problems

What countries in the initial formation of Euro zone did not adopt the Euro?

Britain, Denmark and Sweden are still on the sidelines

3. How are spot exchange rates in the foreign exchange markets determined? By using historical average prices. By the relative demand and supply for different currencies. By taking the average of a basket of currencies. By government decree.

By the relative demand and supply for different currencies.

4. According to internalization theory, licensing has three major drawbacks as a strategy for exploiting foreign market opportunities. Each of the following is a drawback of licensing except: A. Licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor. B. Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. C. Licensing helps a firm avoid making a direct foreign investment in a foreign country. D. When a firm's competitive advantage is based not so much on its products as on the management, marketing, and manufacturing capabilities that produce those produces, licensing fails to capture those advantages

C. Licensing helps a firm avoid making a direct foreign investment in a foreign country.

5. In the 1960s, RCA licensed its leading-edge color television technology to a number of Japanese companies, which later took over the market. This demonstrates: A. Licensing is always better than FDI. B. There are certain capabilities that are often not amenable to licensing. C. Licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor. D. Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.

C. Licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor.

11. A(n) _____ has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members. (Find the answer) Free trade area Customs union Common market Exclusive economic zone

Common market

Why was the dollar no longer convertible into gold?

Confidence in the system fell, and people began to demand gold for their currency putting pressure on countries' gold reserves, and forcing them to suspend gold convertibility

20. _____ refers to a range of barter-like agreements by which goods and services can be traded for other goods and services. Countertrade Price discrimination Cartelization Dumping

Countertrade

Currency Board

Currency Boards A country with a currency board commits to converting its domestic currency on demand into another currency at a fixed exchange rate The currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100% of the domestic currency issued Additional domestic notes and coins can be introduced only if there are foreign exchange reserves to back it

Currency crisis what is it ?

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 in order to defend prevailing exchange rates

11. This account in the balance of payments, records transactions involving the export and import of goods and services. Current account Foreign account Internal account Tariff account

Current account The current account tracks the export and import of goods and services. Governments normally are concerned when their country is running a deficit on the current account of their balance of payments.

9. Which of the following is a possible adverse effect of FDI on a host country's balance-of-payments position? A. A foreign subsidiary exports a substantial number of its outputs abroad. B. A foreign subsidiary gets a substantial number of its inputs from the host country. C. Increased competition in the domestic markets. D. Subsequent outflow of earnings from the foreign subsidiary to its parent company.

D. Subsequent outflow of earnings from the foreign subsidiary to its parent company. Set against the initial capital inflow that comes with FDI must be the subsequent outflow of earnings from the foreign subsidiary to its parent company. Such outflows adversely affect balance of payments accounts by showing up as capital outflow on them.

8. The basic objective of the Association of Southeast Asian Nations is to A. create a central political apparatus that coordinates the economic, social, and foreign policy of the member countries B. establish a common market by the end of 2020 C. adopt a common currency. D. foster freer trade among member countries

D. foster freer trade among member countries Formed in 1967, the Association of Southeast Asian Nations (ASEAN) includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Laos, Myanmar, Vietnam, and Cambodia have all joined recently, creating a regional grouping of 600 million people with a combined GDP of some $2 trillion. The basic objective of ASEAN is to foster freer trade among member countries and to achieve cooperation in their industrial policies.

12. Why has FDI grown more rapidly than world trade? Why do we (USA) predict we may see FDI increase under the trump administration? Is it because of decline in trade barriers or because Executives see FDI as a way of circumventing future trade barriers.

Executives see FDI as a way of circumventing future trade barriers

If 3M, am American firm produces adhesive tape in St. Paul, Minnesota, and ships the tape to South Korea to be sold, that is an example of:

Exporting

Fixed Exchange Rate

countries fix their currencies against each other at a mutually agreed upon value

16. A _____ is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. currency barter currency exercise currency option currency swap

currency swap

7. currency carry trade takes advantage of: A. temporary undervaluation of one currency vis-à-vis another. B. differences in interest rates between countries. C. mispricing of stocks trading in two exchanges. D. high volatility in currency exchange rates.

differences in interest rates between countries.

7. The viability of an exporting strategy is often constrained by transportation costs, particularly of products (as we saw in the case example on Cemex)that have a _____ and that can be produced in almost any location. high local content requirement low total landed cost low value-to-weight ratio low licensing tariff

low value-to-weight ratio The viability of an exporting strategy is often constrained by transportation costs. When transportation costs are added to production costs, it becomes unprofitable to ship some products over a large distance. This is particularly true of products that have a low value-to-weight ratio and that can be produced in almost any location.

Dirt float/ managed float

managed float or dirty float exists when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency

Dirty Float

managed float or dirty float exists when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency

14. The principle argument of those who opposed NAFTA centered on the fear that ratification would result in: (Find the answer) low interest rates and high inflation in the U.S. and Canada. mass exodus of jobs from the United States into Mexico. a move towards a common currency for NAFTA member nations. retaliation from the European Union.

mass exodus of jobs from the United States into Mexico.

10. To encourage inward FDI, it is increasingly common for governments to: -offer tax concessions to firms that invest in their countries. -exclude foreign companies from specific industries. -require that local investors own significant proportion of the equity. -establish control over the behavior of the MNE's local subsidiary.

offer tax concessions to firms that invest in their countries. It is common for governments to offer incentives to foreign firms to invest in their countries. Such incentives take many forms, but the most common are tax concessions, low-interest loans, and grants or subsidies.