IB Exam 3

What triggered Argentina's ninth default in history on May 22, 2020?

The failure to make a $503 million interest payment to creditors.

How many times has Argentina defaulted on its debt obligations?

Nine times.

What is the Law of One Price?

It states that identical goods should sell for the same price when expressed in a common currency, assuming no transportation costs.

What is Purchasing Power Parity (PPP)?

A theory that compares different countries' currencies through a market 'basket of goods' approach, often illustrated by the Big Mac Index.

What are the main functions of the Foreign Exchange Market?

Currency conversion, tourism, business transactions, exports, imports, investments, and currency speculation.

What are Spot Exchange Rates?

The current exchange rate at which a currency can be bought or sold for immediate delivery.

What are Forward Exchange Rates?

The agreed-upon exchange rate for a currency transaction that will occur at a future date.

What is a Currency Swap?

An agreement to exchange principal and interest in one currency for the same in another currency.

What is Arbitrage in the context of foreign exchange?

The simultaneous purchase and sale of a currency in different markets to profit from differing prices.

What factors can cause fluctuations in FX rates?

Inflation, investment interest rates, and market psychology.

What is the Fisher Effect?

A theory that describes the relationship between nominal interest rates, real interest rates, and expected inflation.

What is the International Fisher Effect?

A theory stating that the expected change in the exchange rate between two currencies is equal to the difference in their nominal interest rates.

What is the Bandwagon Effect in market psychology?

A phenomenon where investors follow the majority trend, often leading to overvaluation or undervaluation of currencies.

What is FX Hedging?

Strategies used to protect against fluctuations in exchange rates, including buying foreign currency or forward contracts.

What are the three types of transaction exposure in foreign exchange?

Obligations to purchase or sell, translation exposure, and economic exposure.

What is the significance of the Big Mac Index?

It serves as a lighthearted measure of purchasing power parity between currencies based on the price of a Big Mac.

What historical example illustrates extreme inflation?

Germany's hyperinflation in the early 1920s, where the price of bread skyrocketed from 26 cents to 670 million dollars.

What is a freely convertible currency?

A currency that can be exchanged without restrictions by residents and non-residents.

What is a non-convertible currency?

A currency that cannot be exchanged for foreign currencies by either residents or non-residents.

What is the purpose of a forward contract in FX?

To lock in an exchange rate for a future transaction, reducing uncertainty about future currency values.

What is economic exposure in foreign exchange?

The risk that a company's cash flows will be affected by changes in exchange rates.

What is transaction exposure?

The risk of loss when a company has outstanding obligations to buy or sell foreign currencies.

What is translation exposure?

The risk that a company's financial statements will be affected by changes in exchange rates.

What is a floating exchange rate?

An exchange rate that continually adjusts based on market demand.

What is a pegged exchange rate?

An exchange rate that is pegged to another stable currency or a basket of currencies.

What is a fixed exchange rate?

An exchange rate set at a constant rate between different currencies by agreement, abandoned in 1973.

What was the Gold Standard?

A monetary system where a country's currency is pegged to gold, effectively used from the 1870s to 1914.

How did the Gold Standard maintain balance of trade equilibrium?

Countries with a trade surplus could demand payment in gold, ensuring currency stability.

What is the role of the IMF?

To help nations with currency, banking, or foreign debt crises through lending and policy guidance.

What are some conditions imposed by the IMF for bailouts?

Targets on money supply growth, exchange rate policy, tax policy, government spending, and privatization.

What significant event occurred during the 1995 Mexican Currency Crisis?

The IMF provided a bailout of 20 billion dollars.

What was the purpose of the World Bank when it was initially established?

To finance war-torn European nations by providing low-interest loans.

How did the World Bank shift its focus after the Marshall Plan?

It began loaning to developing countries for infrastructure, agriculture, education, and urban development.

What was the exchange rate of the Argentine peso to the dollar in the 1990s?

1 peso was pegged to 1 dollar.

What led to the Argentine monetary crisis in 2001?

A decrease in demand for Argentine goods due to Brazil's economic difficulties, leading to currency devaluation.

What strategy did China adopt regarding its currency exchange rate?

Initially pegged to the dollar, now pegged to a basket of currencies to support its export economy.

What is the Big Mac Index used for?

To assess price inflation and currency valuation by comparing the price of a Big Mac in different countries.

What does it indicate if a Big Mac is overvalued?

The local currency is stronger than it should be relative to the US dollar.

What does a 34% undervaluation of the Thai Baht indicate based on the Big Mac Index?

The Thai Baht is weaker than it should be compared to the US dollar.

What was one consequence of VW's decision to hedge only 30% of its foreign currency exposure?

A 95% drop in profits due to a sharp rise in the value of the Euro against the Dollar.

What is 'sterilization' in the context of currency imbalance?

A process to neutralize the effects of currency transactions to restore the monetary base to its original size.

How does sterilization work in currency operations?

By offsetting foreign currency sales with purchases of domestic currency to maintain the monetary base.

What was the impact of the 2001 Argentine crisis on unemployment?

Unemployment rose to 25% by 2002 due to economic instability.

What is a 'dirty float' in exchange rate terms?

A pegged exchange rate that is allowed to fluctuate within a certain range against another stable currency.

What happens during a currency crisis?

Countries may need to borrow from the IMF to stabilize their currency and economy.

What is the significance of the US Treasury Department's statement about the Yuan in 2013?

It indicated that the Yuan was significantly undervalued, impacting trade dynamics with the US.

What is the definition of strategy in a business context?

A plan or direction to achieve a specific goal, derived from the Greek word 'stratego' meaning army leader.

How does strategy differ from tactics?

Strategy refers to long-term plans to achieve goals, while tactics are short-term actions taken to execute the strategy.

What are Porter's generic strategies?

Cost Leadership, Differentiation, Segment Differentiation, and Cost Focus.

What is a value proposition?

The unique value that a company offers to its customers, detailing what they are selling.

What is the purpose of a business strategy?

To maximize shareholder value while adapting to a continually changing market.

What does strategic fit refer to?

The alignment of a company's resources and capabilities with its strategic goals.

What are the four basic strategies firms use in global markets?

Global Standardization, Localization, Transnational, and International.

What is a global standardization strategy?

A strategy that focuses on increasing profitability by reducing costs through economies of scale and minimal local responsiveness.

What is a localization strategy?

A strategy that customizes goods or services to match local tastes and preferences, enhancing profitability.

What is a transnational strategy?

A strategy that aims to achieve low costs while differentiating products across geographic markets and fostering skill flow between subsidiaries.

What is an international strategy?

A strategy that involves selling domestically produced products internationally with minimal local customization.

What is the role of core competence in business strategy?

Core competence refers to unique skills in a firm that competitors cannot easily match or imitate.

What are location economies?

Cost advantages obtained by performing value-added activities in the optimal location.

What are experience effects in business?

Improvements in labor productivity that occur as a firm gains experience in producing a product.

What are economies of scale?

Cost advantages that a business obtains due to the scale of operation, with cost per unit of output generally decreasing with increasing scale.

What is the significance of the quote by Sun Tzu regarding strategy?

It emphasizes the importance of understanding strategy for survival and success in competitive environments.

What is the ultimate goal of business strategy?

To achieve a competitive advantage through the configuration of resources in a challenging environment.

What is meant by 'value creation' in a business context?

The process of providing products or services that meet customer needs and expectations, thereby generating profit.

How do firms grow in value?

By increasing profits and achieving more growth.

What is the relationship between strategy and shareholder value?

Effective strategies aim to maximize shareholder value by aligning company goals with market demands.

What does the efficiency frontier represent?

A graphical representation of the trade-off between differentiation and cost efficiency in a business strategy.

What is the significance of IKEA in the context of global business strategy?

IKEA exemplifies a successful international strategy, focusing on cost efficiency and product standardization.

What does the term 'niche player' refer to in business strategy?

A company that focuses on a specific market segment, offering specialized products or services.

What is the impact of changing market conditions on business strategy?

Changing market conditions require businesses to adapt their strategies to maintain competitiveness and profitability.

Who founded IKEA and in what year?

Ingvar Kamprad founded IKEA in 1943.

What does IKEA stand for?

IKEA stands for Ingvar Kamprad, Elmtaryd (the farm where he grew up), and Agunnaryd (his home county).

What is the estimated worth of Ingvar Kamprad?

$39 billion.

What is a notable quote by Ingvar Kamprad about mistakes?

Only those who are asleep make no mistakes.

What does Ingvar Kamprad suggest about time management?

He advises dividing life into 10-minute units and minimizing meaningless activities.

What year was Coca-Cola invented?

Coca-Cola was invented in 1886.

Who created Coca-Cola and what was his profession?

John Pemberton, an Atlanta pharmacist, created Coca-Cola.

What was the initial selling price of Coca-Cola?

Five cents a glass.

How many servings of Coca-Cola are consumed daily?

1.6 billion servings.

What is Coca-Cola's status in the beverage market?

Coca-Cola is the most popular and biggest-selling soft drink in history.

List three flavors of Coca-Cola.

Cola, Cola Lemon, Cola Raspberry.

In how many countries is Coca-Cola available?

Coca-Cola is available in over 200 countries.

What is GEORGIA coffee known for?

GEORGIA is a ready-to-serve canned coffee popular among hard-working people.

Name a flavor of GEORGIA coffee.

Almond Chocolate Coffee Milk.

What is the target market for Smart soft drink?

Smart is targeted towards Chinese kids and teens.

What is Sparletta and where is it sold?

Sparletta is a soft drink sold in Africa since 1955.

What type of drink is Marocha?

Marocha is a green tea drink.

What is Fanta Verdia made from?

Fanta Verdia is made with apple juice and green tea extracts.

What type of drink is Qoo?

Qoo is a light noncarbonated juice drink packed with vitamin C and calcium.

What is the mascot for Qoo?

Qoo's mascot is a whimsical cartoon character that looks vaguely like a cat.

List two flavors of Qoo.

Acerola Lemon and Grape.

What is the significance of the Statue of Liberty in relation to Coca-Cola?

The Statue of Liberty was being constructed in 1886, the same year Coca-Cola was invented.

What role did Frank Robinson play in Coca-Cola's branding?

Frank Robinson named the mixture Coca-Cola and wrote it in his distinct script.

What is a key ingredient in Marocha tea?

Marocha contains kabusecha leaves, which are grown sheltered from light.

Where is Sparletta primarily sold?

Sparletta is sold in various African countries.

What is the flavor profile of Fanta Verdia?

Fanta Verdia is low-carb and low-calorie, made with apple juice.

First Mover

First to sell the product

Fast Follower

Entered early but not first

Advantages of First Mover

Preempt Competition - Brand, Build Market Share - Experience Curve, Integrate with other industries

Disadvantages of First Mover

Pioneering Costs, Learning Curve, Product Introduction, Changing Regulations, Switching Costs