International Business Hill Hult 11e Chapter 10

foreign exchange market

used to convert the currency of one country into the currency of another. Provides some insurance against foreign exchange risk

exchange rate

the rate at which one currency is converted into another

foreign exchange risk

The risk that changes in exchange rates will hurt the profitability of a business deal

currency speculation

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

carry trade

a kind of speculation that involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interest rates are high

spot exchange rate

the exchange rate at which a foreign exchange dealer will convert one currency into another that particular day. Spot rates change continually depending on the supply and demand for that currency and other currencies.

forward exchange

occurs when two parties agree to exchange currency and execute the deal at some specific date in the future to insure or hedge against a possible adverse foreign exchange rate movement, firms engage in what?

forward exchange rate

The exchange rates governing forward exchange transactions

currency swap

simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. They are transacted between international businesses and their banks, between banks, between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange rate risk

arbitrage

the process of buying a currency low and selling it high

law of one price

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 same currency

efficient market

A market where prices reflect all available information.

Fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

international Fisher effect

For any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between countries

bandwagon effect

when expectations on the part of traders turn into self-fulfilling prophecies - traders can join the bandwagon and move exchange rates based on group expectations.

inefficient market

A market in which prices do not reflect all available information.

freely convertible currency

A country's currency is freely convertible when the government of that country allows both residents and nonresidents to purchase unlimited amounts of foreign currency with the domestic currency.

externally convertible currency

Nonresidents can convert their holdings of domestic currency into foreign currency, but the ability of residents to convert the currency is limited in some way.

nonconvertible currency

when both residents and non-residents are prohibited from converting their holdings of domestic currency into a foreign currency

capital flight

when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency

countertrade

barter like agreements by which goods and services can be traded for other goods and services

transaction exposure

the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. Includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies

translation exposure

the impact of currency exchange rate changes on the reported financial statements of a company. It is concerned with the present measurement of past events. Gains and losses are "paper losses". They are unrealized.

economic exposure

the extent to which a firm's future international earning power is affected by changes in exchange rates. Concerned with the long-term effect of changes in exchange rates on future prices, sales, and costs

lead strategy

attempt to collect foreign currency receivables early when a foreign currency is expected to depreciate and pay foreign currency payables before they are due when a currency is expected to appreciate

lag strategy

delay collection of foreign currency receivables if that currency is expected to appreciate and delay payables if the currency is expected to depreciate

True

Events in the foreign exchange market affect firm sales, profits, and strategy

True

A firm that insures itself against foreign exchange risk is hedging

True

Spot exchange rates can be quoted as the amount of foreign currency one U.S. dollar can buy, or as the value of a dollar fro one unit of foreign currency.

True

If exchange rates quoted in different markets were not essentially the same, there would be an opportunity for arbitrage.

future exchange rate movements

These three factors: (1) a country's price inflation, (2) a country's interest rate, (3) market psychology impact what?

True

a positive relationship exists between the inflation rate and the level of money supply. When the growth in the money supply is greater than the growth output, inflation will occur

True

PPP theory suggests that changes in relative prices between countries will lead to exchange rate changes, at least in the short run

fundamental

this type of analysis draws upon economic factors like interest rates, monetary policy, inflation rates, or balance of payments information to predict exchange rates

technical

this type of analysis charts trends with the assumption that past trends and waves are reasonable predictors of future trends and waves.

transaction and translation exposure

managers should buy forward, use swaps, and lead and lag payables and receivables to minimize what?