Management 302 Exam 2

Front 1

Foreign Exchange Market

Back 1

a market for converting the currency of one country into the currency of another

Front 2

Foreign Exchange Market

Back 2

a market for converting the currency of one country into the currency of another

Front 3

Exchange Rate

Back 3

the rate at which one currency is converted into another

Front 4

Foreign Exchange Risk

Back 4

the risk of an investment’s value changing due to changes in currency exchange rates

Front 5

Arbitrage

Back 5

the purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy

Front 6

Currency Speculation

Back 6

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

Front 7

Spot Exchange Rate

Back 7

the exchange rate at which a foreign exchange dealer would convert one currency into another currency on that day

Front 8

Forward Exchange Rate

Back 8

the exchange rate at which a foreign exchange dealer will agree to convert one currency into another currency on a specific date in the future

Front 9

Economic Exposure

Back 9

the extent to which a firm’s future international earning power is affected by changes in exchange rates

Front 10

Hedging

Back 10

a position established in one market in an attempt to offset exposure to the price risk of an equal but opposite obligation or position in another market — usually, but not always, in the context of one's commercial activity.

Front 11

Forward Contract

Back 11

contracts to buy or sell at a specific date in the future at a price specified today. The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange.

Front 12

Option

Back 12

a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to buy or to sell a particular asset (the underlying asset) at a later day at an agreed price. In return for granting the option, the seller collects a payment (the premium) from the buyer

Front 13

Currency Swaps

Back 13

a foreign exchange agreement between two parties to exchange principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal (regarding net present value) loan in another currency. Currency swaps are motivated by comparative advantage.

Front 14

What are the Two Drivers of Exchange Rate Determination?

Back 14

Price Inflation and Interest Rates

Front 15

Price Inflation Theory states that A country with high inflation should expect its currency to __________ against the currency of a country with a lower inflation rate

Back 15

depreciate

Front 16

Increasing the money supply usually _______ inflation

Back 16

triggers

Front 17

Interest Rates Theory states that when interest rates rise, it is because inflation is expected to _______

Back 17

increase

Front 18

Any differences in “real” interest rates will be equalized through ________ and therefore any difference in “nominal” interest rates are due to expectations about inflation

Back 18

arbitrage

Front 19

Law of One Price states that in _________ markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for ______ price(s) when their price is expressed in the same currency

Back 19

competitive, the same

Front 20

Purchasing Power Parity

Back 20

the difference in amount of identical goods that one currency can buy when spent in two different countries

Front 21

Big Mac Index

Back 21

an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries.

Front 22

How Increasing the Money Supply Impacts Exchange Rates

Back 22

When Velocity and Number of Goods and Services in the market are held constant, increasing the money supply will cause inflation because it causes prices to rise

Front 23

Price Discrimination

Back 23

the practice of charging different prices for the same product in different markets

Front 24

With the International Fisher Effect, the difference in the nominal interest rates between two countries determines the movement of the nominal exchange rate between their currencies, with the value of the currency of the country with the _______ nominal interest rate increasing

Back 24

lower

Front 25

Bandwagon Effect

Back 25

when one person does something, everyone else follows if it seems like a good idea

Front 26

The Efficient Market School

Back 26

a market where prices reflect all available information

Front 27

Inefficient Market School

Back 27

one in which prices do not reflect all available information

Front 28

Fundamental Analysis

Back 28

markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security.

Front 29

Technical Analysis

Back 29

information is reflected already in the stock price, so fundamental analysis is a waste of time. Technical analysis does not care what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns.