International Logistics Ch8

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Artificial Currency

Back 1

A currency that is not in circulation. After the euro was changed into a circulating currency on January 1, 2002, the only artificial currency left was the Special Drawing Rights of the International Monetary Fund.

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Call options

Back 2

A currency option in which a firm agrees to buy a particular currency at a particular price, called the strike price, on a given date.

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convertible currency

Back 3

A currency that can be converted into another currency.

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currency

Back 4

The monetary unit used in a particular country for economic transactions.

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currency bloc

Back 5

A group of currencies whose values fluctuate in parallel fashion. The currencies within the group have a fixed exchange rate, but their exchange rates with currencies outside of the group float.

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currency futures

Back 6

A method used to trade currencies; the value of a fixed quantity of foreign currency for delivery at a fixed point in the future is determined by market forces.

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currency options

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A method used to speculate on the value of a currency in the future. A firm can purchase options to buy (called call options) or options to sell (called put options) a particular currency at a particular price, called the strike price, on a given date.

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direct quote

Back 8

The value of a foreign currency expressed in units of the domestic currency

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dollarization

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A phenomenon whereby other countries decide to adopt the U.S. dollar as their circulating currency

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euro

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The common currency of 16 of the 27 countries of the European Union.

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exchange rate risk

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The risk represented by the fluctuation in exchange rates between the time at which two companies entered in an international contract and the time at which that contract is paid

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fisher effect

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An economic theory that holds that the interest rates that businesses and individuals pay to borrow money should be uniform throughout the world and that the nominal interest rates that they actually pay in a given country are composed of this common interest rate and the inflation rate of that country.

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floating currency

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A currency whose value is determined by market forces. The exchange rate of a floating currency varies frequently

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forward exchange rate

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The exchange rate of a foreign currency for delivery in 30, 90, or 180 days from the date of the quote.

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forward market hedge

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A financial technique designed to reduce exchange rate fluctuation risks in which a business agrees to purchase (or sell) a particular currency at a predetermined exchange rate at some future time (generally 30, 60, 90, 180, or 360 days later).

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hard currency

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A currency that can easily be converted into another currency.

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inconvertible currency

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A currency that cannot be converted into another currency

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indirect quote

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The value of the domestic currency expressed in units of the foreign currency

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interest rate parity

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An economic theory that holds that the forward exchange rate between two currencies should reflect the differences in the interest rates in those two countries.

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international fisher effect

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An economic theory that holds that the spot exchange rates between two countries’ currencies should change in function of the differences between these two countries’ nominal interest rates

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money market hedge

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A financial technique designed to reduce exchange rate fluctuation risks in which a business invests funds in an interest-bearing account abroad or borrows funds from a bank abroad.

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options market hedge

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A financial technique designed to reduce exchange rate fluctuation risks in which a business purchases (or sells) options in a particular currency.

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outright rate

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The exchange rate of a foreign currency for delivery in 30, 90, or 180 days from the date of the quote. The outright rate is the rate at which a commercial customer would purchase the currency

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pegged currency

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A currency whose value is determined by a fixed exchange rate with another, more widely traded currency

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points

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In a forward exchange rate, the difference between the outright rate and the swap rate. Points are not fixed units; their value depends on the way a currency is expressed, but is the smallest decimal value in which that currency is traded.

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purchasing power parity

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An economic theory that holds that exchange rates should reflect the price differences of each and every product between countries

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put options

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A currency option in which a firm agrees to sell a particular currency at a particular price, called the strike price, on a given date.

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risk rentention

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A risk management strategy in which a company elects to retain a certain type of risk and decides not to insure that risk.

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soft currency

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A currency that cannot be easily converted into another currency.

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Special Drawing Rights (SDR)

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An artificial currency of the International Monetary Fund. Its value is determined by the value of a basket of four currencies: the euro, the Japanese yen, the U.S. dollar, and the British pound

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Spot Exchange Rate

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The exchange rate of a foreign currency for immediate delivery (within 48 hours).

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Strike Price

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The price at which a currency option is exercised

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Swap rate

Back 33

The exchange rate of a foreign currency for delivery in 30, 90, or 180 days from the date of the quote. The swap rate is the difference between the current spot rate and the rate at which a commercial customer would purchase the currency. It is expressed in points that must be subtracted or added to the spot rate

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Term of sale

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An element in a contract of sale that specifies the method of payment to which an exporter and an importer have agreed

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Term of trade

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An element in a contract of sale that specifies the responsibilities of the exporter and of the importer

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transaction exposure

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The risk represented by the financial impact of fluctuations in exchange rates in an international transaction. A small exposure means that the firm is likely to be largely unaffected by a change in exchange rates, because the amount of the transaction is small relative to the company's size.

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In valuing a currency, the direct quote is ___.

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the value of the foreign currency expressed in units of the domestic currency

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Stable countries representing the greatest percentage of world trade all have ___ currencies

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floating

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Market-based forecasting of exchange rates ___.

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a) is based on the premise that "the market knows best"


b) attempts to capture the collective knowledge of sophisticated speculators in the future spot rate of a currency


c) does not take into account government interventions

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A forward market hedge ___.

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a) allows a company to protect itself from currency fluctuations


b) may involve selling forward a future receivable in a foreign currency


c) may involve purchasing forward the currency necessary to cover a foreign payable

Front 41

SDRs of the International Monetary Fund can be used in exchanges ___.

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as an artificial currency

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International exchange rates began to float ___.

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a) in 1971



b) at the end of the gold standard


c) and it changed the role of the International Monetary Fund

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The International Bank for Reconstruction ___.

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is also known as the World Bank

Front 44

The risk resulting from possible fluctuations in currency exchange rates is called ___.

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transaction exposure

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Among the companies that are exposed to risks in currency fluctuation are ___.

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a) firms that do not evaluate international currency transaction risks clearly


b) firms that do not follow a specific policy on currency exchange


c) firms that have management that is not well-versed in the intricacies of international trade

Front 46

what are the three possible choices that an exporter can make (in terms of currency) for a specific transaction

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exporters currency
importers currency
third country currency

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three different types of exchange rates

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spot exchange
forward exchange
future exchange

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three different types of currencies

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floating currencies
pegged currencies
floating currency blocs

Front 49

name three theories fo exchange rates

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purchasing power parity
fischer effect
intereste rate parity

Front 50

what is the interest rate parity

Back 50

an economic theory that holds that the forward exchange rate between two currencies should reflect the differences in the interest rates in those two countries

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what are the three types of hedging

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forward market hedging
money market hedging
open market hedging