International Business Exam 4
Assume that the current exchange rate is €1= $1.50. If you exchange €1000 for dollars you will receive _____.
$1500 (1000x1.5)
What is a con of a fixed exchange rate?
-any pressure on the dollar could ruin the system
What are the three types a financial crisises?
-currency crisis -banking crisis -foreign debt crisis
Why are financial services becoming less regulated?
-development of Eurocurrency -pressure from financial service companies -increasing acceptance of the free-market ideology associated with an individualistic political philosophy
What are the cons of pegged exchange rates?
-excessive private sector debt -expanding current account trade deficits
What did the Jamaica agreement decide?
-floating rates are acceptable -gold was abandoned as a reserve asset -The total annual IMF quotas (the amount member countries contribute to the IMF) were increased to $41 billion
What are the cons of the euro currency market?
-if the bank fails depositors have a higher risk of losing money -borrowing international funds can expose a company to foreign exchange risk
What are the pros of a pegged exchange rate
-imposes monetary discipline on a country -leads to low inflation
Who are the main players in the capital markets?
-investors (individual, company, institution) -market makers (commercial/investment bankers) -borrowers (individual, company, gov)
What are the benefits of the euro currency market?
-lack of government regulation -can offer higher interest rates (good if you want to deposit cash) -can offer lower interest rates (good if you want to borrow)
What are the pros of floating exchange rate?
-monetary Policy Autonomy -automatic Trade Balance Adjustments -help country deal with economic crisises
What are global capital market risks?
-nations are becoming more vulnerable to speculative capital flow -lack of "patient money" (supports long term cross border capital flow) -lack of quality info
What are the pros of a fixed exchange rate?
-puts the brake on competitive devaluations -brings stability to the world trade environment -imposes monetary discipline on countries, thereby curtailing price inflation
What are the functions of the foreign exchange market?
1. Currency conversion 2. Provide insurance against foreign exchange risk
What are the three types of foreign exchange risk?
1. spot exchange rates 2. forward exchange rates 3. currency swaps
An equity loan is made when:
A corporation sells stock to investors
_____ requires a corporation to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making
A debt loan
What is a banking crisis?
A loss of confidence in the baking system that leads to a run on banks, as individuals and companies with drawl their deposits
What is an inefficient market?
A market in which prices do not reflect all available information
What is portfolio risk?
A portfolio with many investments, each of those investments carries it's own risk, and all of these risks combined expose your portfolio
What is countertrade?
A range of barter like agreements by which goods and services can be traded for other goods and services
What is a foreign debt crisis?
A situation in which a country cannot service it's foreign debt obligations, whether private sector or government debt
What is a currency crisis?
A speculative attack on the exchange value of a currency results in a sharp depreciation the value of the currency or forces authorities to expand large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate
What is a forward contract?
An informal agreement traded through a broker-dealer network to buy and sell specified assets, typically currency, at a specified price at a certain future date
What is a euro currency market?
Any currency banked outside it's country of origin
What is the Brenton Woods agreement?
At the height of World War II, representatives from 44 countries established two multi national institutions the IMF and World Bank
Which of the following occurs when trader start moving as they heard in the same direction at the same time?
Bandwagon effect
What is carry trade?
Borrowing in one currency where interest rates are low and then using the proceeds to invest in another country where interest rates are high
How can managers hedge against currency fluctuations?
By maintaining strategic flexibility by dispersing production to different locations around the globe
Which of the following would a follower of the inefficient market school of thought agree with?
Companies would be better off investing in foreign exchange forecasting services
What is the currency board system?
Converts domestic currency on-demand into another currency at a fixed exchange rate
What can adverse movements in foreign exchange rates substantially increase?
Cost of foreign currency loans
What is a dirty float?
Countries that try to hold the value of their currency with in some range against an important reference country's currency such as the US dollar or basket of currencies
The Asian economic crisis and the global financial of 2008 2009 crisis were caused by _____.
Excessive debt
True or false? The cost of capital is the difference between cost of inputs and outputs
False
True or false? Using floating exchange rates will help countries reduce the risk of investing in foreign assets
False
What is the International Fisher effect?
For any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between countries
Borrowers can hedge against foreign exchange risks by entering into a _____ contract
Forward
Market makers are the financial service companies that connect investors and borrowers. Those who want to borrow money typically include:
Governments
Where have foreign debt crisises taken place?
Greece, Ireland, and Portugal in 2010
Which of the following is a common criticism against the International Monetary Fund?
IMF lacks any real mechanisms for accountability
Which country is an example of a banking crisis?
Iceland in 2008
What is the law of one price?
In competitive markets free of transportation cost and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency
_____ perform a direct connection function in capital markets
Investment banks
Which of the following is a reason why the global capital market is increasingly becoming speculative?
Investments in the global capital market are faced with a lack of quality information
The systematic risk of the stock market is the:
Level of non-diversifiable risk in an economy
The liquidity of the market is _____ in a purely domestic capital market
Limited
What does the IMF do?
Maintains order in the international monetary system
What is a con of floating exchange rate?
Market forces have produced a volatile dollar exchange rate
What does it mean for a currency to be externally convertible?
Only non-residents may convert it into a foreign currency without any limitations
When using the euro markets, companies:
Pay less for the loans
What is the gold standard?
Pegging currencies to gold and guaranteeing convertibility
What is a hedge fund?
Private investment funds that position themselves to make long bets on assets they think will increase in value and short bets on assets they think will decline in value
In the face of unpredictable movements in exchange rates, businesses should:
Pursue strategies that will reduce their economic exposure
What is capital flight?
Residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency
What is the Jamaica agreement?
Revise the IMF's articles of agreement to reflect the new reality of floating exchange rates
The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will:
See depreciation in it's currency exchange rate
What is currency speculation?
Short term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates
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
What is good par value?
The amount of a currency needed to purchase one ounce of gold
What does it mean for a currency to be freely convertible?
The country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency within it
_____ is characterized by a lack of government regulation
The euro currency market
What is the balance of trade equilibrium?
The income of a country's residences earn from exports is equal to the money it's residents pay to other countries for import
What is the international monetary system?
The institutional arrangements that govern exchange rates
What is systematic risk?
The movements in a stock portfolio's value that are attributable to macro economic forces affecting all firms in an economy rather than factors specific to an individual firm
What is purchasing power parity theory?
The price of a basket of particular goods should be roughly equivalent in each country
What is the cost of capital?
The price of borrowing money
Inflation occurs when:
The quantity of money in circulation rises faster than the stock of goods and services
What is a spot exchange rate?
The rate at which a foreign exchange dealer converts one currency into another currency on a particular day
What is a pegged exchange rate?
The value of the currency is fixed relative to a reference currency, such as the US dollar, and then the exchange rate between that currency and other countries is determined by the reference currency exchange rate
What did the IMF do to help Brazil in 2002 when they went through a currency crisis?
They stabilized the value of the Brazilian currency on the foreign exchange market by lending it foreign currency
True or false? By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market
True
True or false? Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors
True
True or false? Financial services have historically been the most tightly regulated of all industries.
True
True or false? Financial services is an information intensive industry
True
True or false? Investors can reduce the level of risk by diversifying a portfolio internationally
True
True or false? The capital market brings together those who want to invest money in those who want to borrow money
True
True or false? The cost of recording, transferring, and processing information has doubled with the advancements in technology since 1964
True
True or false? The relatively low correlation between the movement of stock markets in different countries indicates that countries face different economic conditions
True
What is one foreign exchange risk?
Unpredictable movements in exchange rates can inject risk into foreign currency borrowing, making something initially inexpensive, expensive
What is a fixed exchange rate?
Values of a set of currencies are fixed against each other at some mutually agreed on exchange rate
What does it mean for a currency to be non-convertible?
When neither residence nor non-residents are allowed to convert it into a foreign currency
What is a floating exchange rate?
When the foreign exchange market determines the relative value of a currency
What is a forward exchange?
When two parties agree to exchange currency and execute the deal at some specific date in the future (usually 30, 90, or 120 days)
What is inflation?
a general increase in prices and fall in the purchasing value of money
What is a currency swap?
simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
What is a foreign bond?
sold in a foreign country and denominated in that country's currency
