International Finance Test 1

Front 4

How firms engage in international Business

Back 4

International Trade, Licensing, Franchising, Joint Ventures, Acquisitions, and Establishing New Foreign Subsidiary

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International Trade

Back 5

Conservative used to penetrate markets by exporting or importing. Places non of a firms capital at risk.

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Franchising

Back 6

Firm provides its technology (copyrights,patents,trade names) in exchange for revenue fees or other benefits. Use tech in other country without transportation cost and investment. Firm may lose quality control

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Joint Ventures

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Venture jointly owned and operated by two or more firms (typically one firm resides in the desired market) and each firm applies its comparative advantage.

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Acquisitions

Back 8

Acquire other firms in foreign country to penetrate foreign market. Have full control over the acquired business. Subject to risk and large loss, involves large investment.

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Establish new Foreign Subsidiary

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Establishing new operation in foreign countries to produce and sell their products. Risky and involves large investment.

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Direct Foreign Investment

Back 10

Any method of increasing international business that involes direct investment in foreign operations .

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Least Risky International Business Strategy

Back 11

International Trade and Franchising

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Most Risky

Back 12

Acquisitions and Establishing Subsidiary (DFI)

Front 13

How to reduce agency costs?

Back 13

Provide managers with stock in the MNC as part of their compensation…

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Currency Exchange Conversion

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Foreign $ * Spot Price = Amount of home $ for 1 foreign $.

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Exchange rate risk b/w MNC and Subsidiary.

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Home $ rises its current account decreases because foreign demand for homes goods decreases (exports decrease). Foreign $ rises, homes current account increases because foreigns demand for homes good increases

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Which risk is always present for national and international corporations

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Interest rate risk and business risk

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Things to eliminate interest rate risk

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Current Account

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Purchases between one specified country and all other countries for goods and services (tangible products and tourism/consulting), factor income (Interest/Dividend Payments) on foreign securities, transfers (grants/aids). Net of Cash inflows and outflows

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Tariffs

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Tax Restrictions on importing making the price of foreign goods higher.

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Quota

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Maximum amount a country can import

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Impact of Cost of Labor on international trade flow

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Countries where labor costs are low have an advantage when competing globally in labor intensive industries (china)

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Impact of Inflation on international trade flow

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If inflation increases relative to the country it trades with, its current account will decrease (consumers will buy in foreign markets because prices arent rising as fast)

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Impact of Government policy on international trade

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Governments want to increase a countries exports because it generates production and income. (restricts its imports with tariffs and quotas, impacts exports by its stance on piracy/offer low cost subsidies)

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Impact of piracy restrictions on international trade

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A government can decrease imports by its lack of restrictions on piracy.

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Weaker home $ can reduce the balance of trade deficit (increase inflows and decrease outflows)

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Homes goods are cheap because of weakening home $, this makes foreign countries with stronger $ import.

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J-Curve

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Bretton Woods Agreement

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Called for fixed exchange rates between currencies. Prevent exchange rate changes from movine more than 1%.

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Gold Standard

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Currency converts to gold at a specific rate. The exchange rates between two currencies determined relative to their convertibility rates per ounce of gold

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Spot Market

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Market where Foreign exchange transaction is for immediate exchange rate (spot rate).

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Futures contract

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right and obligation buy/sell on an exchange, specifies standard volume of a currency to be exchanged on a specific date. Used to hedge an MNC's position. Standardized, sold over an exchange

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Forward

Back 31

right and obligation buy/sell over the counter. Can be tailored, sold between MNC and financial institution

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Put

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right to sell an derivative

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Call

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right to buy a derivative

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Direct quotation

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Quotations that reflect currency in US dollars

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Indirect quote

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Quotations that reflect currency in number of units of a foreign currency. This is the reciprocal of the corresponding direct quote.

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Currency Cross rate

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Two non dollar currency's from a dollar quotation. Take value of desired $ in terms of USD / other $ in terms of USD to find the value of desired $ in terms of the other $.

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ADR American Depository Receipts

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Way to obtain equity financing, certificates representing bundles of stock. Gets around some disclosure requirements. ADR should move with the moves in the stock on the foreign stock exchange.

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Bid/Ask

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Bid is the rate at which banks buy currency for, Ask is the rate at which banks sell currency for. Ask is always more than the Bid.

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LIBOR (Londo Inter Bank Offer Rate)

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Floating loan that minimizes interest rate risk, the rate commonly charged for loans between banks.

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Real/Nominal

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Nominal is the real rate adjusted for inflation (Nominal = real rate +inflation)

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US Inflation rises and exchange rates

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Demand for foreign goods Increases, demand for foreign currency increases, supply of foreign currency decreases, US exchange rate increases.

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US Interest rates rise and exchange rates

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Demand for US investments Increases, demand for foregin currency decreases, supply of foreign currency increases, US exchange rates decrease.

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US Relative income rises and exchange rates

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Demand for foreign currency increases, supply of foreign currency doesn’t change, US exchange rates rise

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US Government Controls Increase

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Demand for foreign decrease, the supply of foreign does not change, the exchange rate decreases

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Forward Discount Premium

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F = S(1+p)

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In terms of receivables an options, the last the you want is a ____ and a ____ protects you against this

Back 46

decrease in exchange, put (protects against a downturn in the market)

Front 47

What is most important for the financial markets regarding consumption smoothing

Back 47

Liquidity

Front 48

If there is no transaction cost the forward, the futures, and the spot price will be the same