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83 Cards in this Set
- Front
- Back
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Theory of Comparative Advantage
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allows firms to penetrate foreign markets. If a country specializes in something, trade is essential for others
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Imperfect Markets
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provides an incentive for firms to seek out foreign opportunity- conditions where factors of production are somewhat immobile
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Product Cycle Theory
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firms become established in the home market as a result of some perceived adv over existing competitors, such as a need by the mkt for one more supplier of the product
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How Firms engage in intl business
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Intl Trade
Licensing Franchising Joint Ventures Acquisitions of Existing Ops Establish new frgn subsidiaries |
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Balance of Payments
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summary of transactions between domestic and foreign residents for a specific country over a specified period of time.
accounts for transactions by biz, individuals & govt. |
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NAFTA- North American Free Trade Agreement
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trade barriers between US and Mexico were eliminated (93).
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GATT- General Agreement on Tariffs and Trade
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called for reduction or elimination of trade restrictions on specified imported goods over a 10y period across 117 countries
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Inception of Euro
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1999- several European countries adopted the Euro as their currency for business transactions between these countries.
2001-phased in as a currency for other transactions. 1/1/02- completely replaced the currencies of the participating countries. |
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Factors Affecting Intl Trade Flows
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Inflation
National Income Government Policies Exchange Rates |
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Correcting a Balance of Trade Deficit
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any policy that will increase foreign demand for country's goods and services
Export Prices become more attractive inflation low, currency value reduced- prices cheaper from foreign perspective |
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IMF- International Monetary Fund
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promote cooperation among countries on intl monetary issues
stability in exchange rates promote free trade promote free mobility of capital funds across countries |
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CFF- Compensatory Financing Facility
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reduce the impact of export instability on country economies
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SDR- Special Drawing Rights
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not a currency, but simply a unit of account
International reserve asset created by the IMF and allocated to member countries to supplement currency reserves |
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World Bank
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also referred to as IBRD
est in 1944 primary objective- make loans to countries to enhance eco development |
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WTO-World Trade Org.
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established to provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT accord.
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IFC- International Financial Corp
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established to promote private enterprise within countries.
works to promote economic development through the private, rather than the govt sector |
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IDA-International Development Ass
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created in 1960 with country development objectives similar to those of the world bank
extends loans at low int rates to poor nations that cannot qualify for loans from the World Bank |
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BIS- Bank of Intl Settlements
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attempts to facilitate cooperation among countries w/ regard to intl transactions. Also provided assistance to countries experiencing financial crisis
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Spot Market
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immediate exchange
most common type of foreign exchange transaction |
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Bid
Ask Bid/Ask Spread |
Buy
Sell differential btwn Bid/Ask- intended to cover costs involved in exchanging currencies *bid quote less than ask quote* |
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International Money Market
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includes large banks in countries around the world
European money mkt & Asian money mkt- two important components short term funding |
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International Credit Market
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well developed in Asia and is developing in South America
medium term funding |
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Euro Bonds
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are bonds that are sold in countries other than the country of the currency denominating the bonds
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International Bond Market
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attract stronger demand by issuing in bonds in other countries
Long term funding |
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International Stock Market
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long-term funding
issuance of stock in a foreign country can enhance the firm's image |
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ADR- American Depository Receipt
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certificates representing bundles of stock
enables non U.S. firms to tap the U.S. market for funds |
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Exchange Rate Equilibrium
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The exchange rate at which the demand for a currency and supply of the same currency are equal.
Indicates that the price of exchanging two currencies will remain stable |
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Demand for a Currency
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this happens when the foreign currency is weaker than home currency
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Supply for a Currency
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Supply of currency will be high when currency is valued high
Supply of currency will be low when currency is valued low |
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Factors that Influence Exchange Rate
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% change in the spot rate
inflation rate interest rate income level government controls change in expectation of future exchange rates |
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Bank Speculation
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if a currency is believed to be valued to high, borrow that currency, convert to your own- when it declines pay off loan (price will cheaper)
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Forward Market
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facilitates the trading of forward contracts on currencies
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Forward Contract
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is an agreement between a corp. and a financial institution to exchange a specified amount of a currency at a specified exchange rate (forward rate) on a specified date in the future
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Trading Currency Futures
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b/s a currency futures contract for a specific currency and settle date is communicated to brokerage firm, which sends to CME
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Exhibit 5.3
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See page 124
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Currency Call Option
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grants the right to buy a specific currency at a designated price within a specific period of time.
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Currency Put Option
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has the right to sell a currency at a specified price within a specified period of time.
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Fixed Exchange Rt System
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rates either held constant or allowed to fluctuate within very narrow boundaries.
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Freely Floating Exchange Rate System
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exchange rate values are determined by market forces w/o intervention by govt.
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Managed Float
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similar to fixed, govt. can intervene to prevent their currencies from moving too far in a certain direction
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Pegged Exchange Rate System
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home currency's value is pegged to one foreign currency or to an index of currencies
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Single European Currency
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Impact: European Monetary Policy
Valuation on the businesses in Europe Financial Flows Exchange Rate Risk |
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Government Intervention
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smooth exchange rate movements
establish implicit exchange rt boundaries to respond to temporary disturbances |
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Direct Intervention
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govt can involve themselves directly to move a particular currency in which it deems appropriate
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Indirect Intervention
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influencing the factors that determine how currency will move
% change in spot rate inflation interest rate income level change in govt controls change in expectations of future exchange rts |
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Forecasting Techniques
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technical
fundamental market based mixed |
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Technical Forecasting
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involves the use of historical exchange rate data to predict future values
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Fundamental Forecasting
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based on fundamental relationships between economic variables and exchange rates.
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Market Based Forecasting
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based on spot rate and forward rate
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Mixed Forecasting
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using all three types of forecasting to assess exchange rate risk
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Hedge Exposure to Payables
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Futures Hedge
Forward Hedge Money Market Hedge Currency Option Hedge |
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Futures Hedge
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purchase a currency futures contract/s representing the currency and amount related to the payables
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Forward Hedge
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negotiate a forward contract to purchase the amount of foreign currency needed to cover the payables.
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Money Market Hedge
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borrow local currency and convert to currency denominating payables. Invest these funds until they are needed to cover the payables
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Currency Option Hedge
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purchase a currency call option/s representing the currency and amount related to the payables.
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Limitations of Hedging
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over hedging
repeated short term hedging |
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Hedging Long Term Transaction Exposure
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Long-term forward contract
Parallel loan |
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Long Term forward Contract
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large intl banks routinely quote forward rates for terms of up to 5 years for gbp, cad, jpy, chf
attractive b/c firms want to protect from exchange rate fluctuations. Maturities of up to 10y or more can be set up for major currencies for very creditworthy customers |
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Parallel Loan
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involves an exchange of currencies btwn 2 parties, with a promise to re exchange currencies at a specified exchange rate on a future date.
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Alternative Hedging Techniques
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Leading and Lagging
Cross-Hedging Currency Diversification |
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Leading and Lagging
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involve adjusting the timing of a payment request or disbursement to reflect expectations about future currency movements.
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Cross Hedging
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common method of reducing transaction exposure when the currency cannot be hedged
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Currency Diversification
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can limit the potential effect of any single currency's movements on the value of an MNC
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Motives for Direct Foreign Investment
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Revenue Related
Cost Related |
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Revenue Related Motives
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attract new sources of demand
enter profitable markets exploit monopolistic advantages React to trade restrictions Diversify Internationally |
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Cost Related Motives
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fully benefit from economies of scale
use foreign factors of production use foreign raw materials use foreign technology react to exchange rate movement |
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Exhibit 13.1
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See page 401
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Political Risk Affecting an MNC
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attitude of consumers in the host country
actions of host govt blockage of fund transfers currency inconvertibility War Inefficient bureaucracy Corruption |
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Techniques to Assess Country Risk
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Checklist Approach
Delphi Technique Quantitative Analysis Inspection Visits Combination of all |
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Long Term Financing Decisions
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Sources of Equity
Sources of Debt |
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Sources of Equity
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If MNC needs, they typically consider a domestic equity offering in their home country in which the funds are denominated in their local currency
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Sources of Debt
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engage in a public placement of debt in their own country or a global debt offering
engage in private placement of debt in their own country or in the foreign country where they are expanding |
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Forward Contract
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agreement between a commercial bank and a client about an exchange of two currencies to be made at a future point in time at a specified exchange rate
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Currency Swap
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agreement to exchange one currency for another at a specified exchange rate and date. Banks commonly serve as intermediaries between two parties who wish to engage in a currency swap
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Payment Methods for Intl Trade
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pre payment
letters of credit drafts consignment open account |
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prepayment
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exporter will not ship goods until the buyer has remitted payment to the exporter
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letters of credit
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instrument issued by a bank on behalf of the importer promising to pay the exporter upon presentation of shipping documents in compliance with the terms stipulated therein
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Draft
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unconditional promise drawn by one party, usually the exporter instructing the buyer to pay the face amount of the draft upon presentation
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Consignment
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exporter ships the goods to the importer while still retaining actual title to the merchandise
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open account
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opposite of pre payment
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Trade Finance Methods
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accounts receivable financing
factoring letters of credit Banker's acceptances working capital financing Medium-term capital goods financing Countertrade |
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exhibit 19.3
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page 565
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Agencies that motivate Intl Trade
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Export-Import Bank of U.S.
Private Export Funding Corp Overseas Private Investment Corp |
