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43 Cards in this Set
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A market for converting the currency of one country into that of another country |
Foreign Exchange Rate |
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The rate at which one currency is converted into another? |
Exchange Rate |
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If the value of the dollar falls against the euro, what are the implications? |
- American goods are cheaper in Europe increasing exports - European goods will be more expensive in the US cutting down on imports |
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The risk that changes in the exchange rate will hurt the profitability of a business deal |
Foreign Exchange Risk |
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What are the four main uses of foreign exchange markets for international business? |
1) Convert payments or income received from foreign countries 2) To pay foreign companies for goods or scv's 3) When investing spare cash in the short term money markets 4) Currency speculation in foreign markets |
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Involves short term movement of funds from one currency to another in hopes of profiting from shifts in the exchange rate |
Currency Speculation |
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Involves borrowing in one currency when international rates are low and then using the proceeds to invest in another currency where interest rates are high |
Carry Trade |
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What are the two main functions of the foreign exchange market? |
1) To convert currency of one country into that of another country 2) Provides insurance against foreign exchange risk |
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The exchange rate at which a foreign currency dealer will convert one currency into another that particular day |
Spot Exchange Rate |
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When two parties agree to exchange currency and execute a deal at some specific date in the future |
Forward Exchange |
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The exchange rate governing forward exchange transactions |
Foreign Exchange Rate |
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If $1 bought more yen with a spot exchange rate than with a 30 day forward exchange rate, what does that indicate? |
It indicates that foreign exchange dealers expect the dollar to depreciate against the yen in the next 30 days |
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Why would a firm enter into a forward exchange contract? |
It is taking out insurance against the possibility that future exchange rate movements will make a transaction unprofitable by the time that the transaction has been executed |
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Simultaneous purchase and sale of a given amount of foreign currency for two different value dates |
Currency Swaps |
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Why would someone do a currency swap? |
You do so when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk |
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Typically do companies convert currencies through their own banks or by entering the market directly? |
Their own banks |
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Name the five most important currency trading centers in the world |
1) London 2) New York 3) Zurich 4) Tokyo 5) Singapore |
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The purchase of securities in one market for the immediate resale in another to profit from price discrepancy |
Arbitrage |
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How long do arbitrage opportunities usually last? |
They disappear in minutes |
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Most foreign exchange transactions involve a countries currency and ________ |
US dollars |
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Exchange rates are determined by _________ and __________ of one currency relative to the ___________ and __________ of another |
Supply and Demand |
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What three factors have the most impact on future exchange rate movements in a country's currency? |
1) The country's price inflation 2) Its interest rate 3) Market psychology |
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In competitive markets, free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in the came currency |
Law of One Price |
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What is an Efficient Market? |
One in which few impediments to international trade and investment exist |
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According to the PPP theorem, the prices should be the same for a particular product, if they are not, it implies what? |
The currency is either overvalued against the dollar or undervalued |
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Inflation occurs when..... |
the quantity of money in circulation raises faster than the stock of goods and services |
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Does the PPP theory predict better in the long run or short run |
Long run - is not good at predicting less than 5 years of exchange rates |
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When dominant enterprises are able to exercise a degree of pricing power, setting different prices in different markets due to varying demand, it is know as what? |
Price Discrimination |
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Nominal interest rates in each country equal to the required real rate of interest and the expected interest rate of inflation over the period of time for which funds are to be lent is known as what? |
Fisher Effect |
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For any two countries the spot exchange rate should change in an equal amount but in the opposite direction to the difference in the nominal interest rate between countries |
International Fisher Effect |
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When traders move like a herd, all in the same direction and at the same time, in response to each others perceived actions |
Bandwagon Effect |
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In which market do prices not reflect all available information |
Inefficient Market |
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A currency that is freely convertable when the govt of that country allows both residents and nonresidents to purchase unlimited amounts of foreign currency with the domestic currency |
Freely Convertible Currency |
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Nonresidents can convert their holdings of domestic currency into foreign currency but residents are limited |
Externally Convertible Currency |
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A currency that is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency |
Nonconvertible Currency |
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Residents convert domestic currency into a foreign currency |
Capital Flight |
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The trade of goods and services for other goods and services |
Countertrade |
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The extent to which income from individual transactions is affected by fluctuations in foreign exchange marrkets |
Transaction Exposure |
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The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values |
Translation Exposure |
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The extent to which a firm's future international earning power is affected by changes in exchange rates |
Economic Exposure |
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Attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate |
Lead Strategy |
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Opposite of Lead Strategy |
Lag Strategy |
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How does a company reduce its economic exposure? |
Distribute the firms production assets to various locations so firms long term financial health is not affected by adverse changes in exchange rates |
