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24 Cards in this Set

  • Front
  • Back
describe the functions of the foreign exchange market
1. convert the currency of one country to the currency of another.
2. insure against foreign exchange risk, or the adverse consequences of unpredictable changes in exchange rates
What is meant by spot exchange rates?
A spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.
What is meant by future exchange rate?
A future exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a future planned date.
What is the fisher effect?
Nominal rate=real interest rate + expected rate of inflation
bandwagon effect?
traders moving as a herd in the same direction at the same time
What are good predictors of long-run changes in exchange rates?
Relative Monetary growth, relative inflation rates, nominal interest rate differentials
Why are they poor predictors of short-run changes?
impact of psychological factors, investor expectations, and bandwagon effects.
Currency Convertibility
Freely convertible-when the country's government allows both residents and non residents to purchase unlimited amounts of a foreign currency.

externally convertible-only non-residents may convert without any limitations

nonconvertible-neither can convert
capital flight
residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency.
a range of barter-like agreements by which goods and services can be traded for other goods and services.
what is the difference between transaction, translation, and economic exposure.
transaction-extent to which the income from individual transactions is affected by fluctuations in foreign exchange values.

translation-impact of currency exchange rate changes on the reported financial statements of a company. **concerned with the present measurement of past events.

economic exposure-extent to which a firm's future international earning power is affected by changes in exchange rates. **Concerned with long run effects
lead strategy vs lag strategy
lead-attempting to collect foreign currency receivables early

lag-delaying collection of foreign currency receivables
Role played by IMF and World Bank
IMF-maintain order in the international monetary systems

world Bank- promote general economic development
fixed vs floating exchange rate
fixed-system for which one currency rate is fixed to another

floating-currency rate is adjusted based on supply and demand
Case for floating exchange rate 2 main elements?
monetary policy autonomy and automatic trade balance adjustments
Case for fixed exchange rates? (4)
monetary discipline, speculation, uncertainty, and the lack of connection between the trade balance and exchange rates
benefits of global capital market?
capital markets bring together those who want to borrow money and those who want to invest money.
why has the global market grown so rapidly?
advances in information technology, and deregulation by governments
What risks are associated with the global market
quickly shifting money,
actions that managers take to attain the goals of the firm.
how can firms profit by globally expanding?
expand the market for products, earn greater return, realize location economies by dispersing individual value creation
Cost pressures and pressures for local responsiveness
p. 431
different strategies?
global standardization strategy, localization, transnational, international
organization architecture
totality of a firms organization including formal organization structure, control systems, and incentives, processes, organizational culture, and people