Global Business Final Exam

Why do governments limit currency convertibility?

to preserve foreign exchange reserves

A lag strategy involves

delaying collection of foreign currency receivables if that currency is expected to appreciate.

Identify the correct statement about the PPP theory.

It predicts that exchange rates are determined by relative prices.

The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will

see depreciation in its currency exchange rate.

In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as

the Fisher effect.

The purchasing power parity (PPP) theory argues that the exchange rate will

change if relative prices change.

Differences in the spot exchange rate and the 30-day forward rate are normal and reflect the expectations of the foreign exchange market about

future currency movements.

What are the two main functions of the foreign exchange market?

converting currency and providing some insurance against foreign exchange risk

According to the law of one price, if the exchange rate between the British pound and the dollar is £1 = $1.50, a shirt that retails for $120 in New York should sell for ________ in London.

£80

If Javier and Miguel agree to exchange currency and execute the deal at some specific time in the future, a ________ occurs.

 

forward exchange

An example of transaction exposure is when

 

companies have obligations for the purchase of goods at previously agreed prices.

Assume that the law of one price holds. A shirt that retails for $120 in New York sells for £60 in London. The exchange rate between the British pound and the dollar is £1 = $1.50. Assuming away transportation costs and trade barriers, this creates a profit-making opportunity called

arbitrage

A key feature of a(n) ________ is that it allows the entity conducting the transaction to do so without incurring foreign exchange risk.

currency swap

A country has an externally convertible currency. This means that

 

only nonresidents may convert it into a foreign currency without any limitations.

The purchasing power parity puzzle is best described as

 

the failure to find a strong link between relative inflation rates and exchange rate movements.

Suppose a government increases the money supply. As a result, there is a surge in the demand of goods as consumers rush to spend their extra money, but producers cannot keep up with demand. What will be the result?

price inflation

An exchange rate of €1 = $1.30 indicates that

one euro buys 1.30 dollars.

Assume that the yen/dollar exchange rate quoted in Tokyo at 3:00 p.m. is ¥120 = $1, and the yen/dollar exchange rate quoted in New York at the same time is ¥123 = $1. A dealer in New York uses dollars to purchase yen and then immediately sells the yen to buy dollars in Tokyo, thereby making a profit. The dealer has engaged in

 

an arbitrage.

Lead Technologies, based in the United States, decides it wants to collect all of its foreign currency receivables from Singapore early because the currency in Singapore is expected to depreciate. This is an example of

 

a lead strategy.

With which statement would a follower of the inefficient market school of thought agree?

 

Companies would be better off investing in foreign exchange forecasting services.

Capital flight is most likely to occur when

the value of the domestic currency is depreciating rapidly because of hyperinflation.

Purchasing power parity theory states that given relatively efficient markets, the price of a “basket of goods” should be

roughly equivalent in each country.

What happens when restrictions on external convertibility are imposed?

Domestic companies’ ability to invest abroad will be limited.

Traders at a stock exchange notice that five traders on the floor seem to be selling more yen and purchasing more euros because of an expected decline in the yen. As a result, all other traders started to do the same. This is an example of the ________ that creates a self-fulfilling prophecy when the yen does decline in value.

bandwagon effect

________ are reported on a real-time basis on many financial websites and are continually changing—their value being determined by supply and demand for that currency relative to others.

Spot exchange rates

Assuming the 30-day forward exchange rate for converting dollars into yen was $1 = ¥130 and the spot exchange rate was $1 = ¥120, the dollar is selling at a ________ on the 30-day forward market.

premium

A currency is said to be freely convertible when

both residents and nonresidents are allowed to purchase unlimited amounts of a foreign currency with it.

How is the International Fisher effect best characterized?

It has not proven to be a good predictor of short-run changes in spot exchange rates.

How is it that spot exchange rates are determined?

by the interaction between the demand and supply of one currency relative to other currencies

A U.S.-based company today invests some of its spare cash in a German money market account that will earn 8 percent for two months. Which of the following, if it happens during the next two months, would imply that the company will earn less than 8 percent on its investment?

The dollar appreciates against the German euro.

Fixed exchange rates lead to speculation and uncertainty in the value of currencies.

false

Supporters of floating exchange rates

 

argue that floating rates help adjust trade imbalances.

One factor that initiated the collapse of the fixed exchange rate system was

 

a worsening of U.S. foreign trade position.

__________ limits the ability of the government to print money and, thereby, create inflationary pressures.

 

A currency board system

The currency of Lebanon is fixed relative to the U.S. dollar. This means that the exchange rate between the Lebanese pound and other currencies is determined by the dollar exchange rate. This reflects a

 

pegged exchange rate.

The world’s four major trading currencies—the U.S. dollar, the European Union’s euro, the Japanese yen, and the British pound—are all free to float against each other. This characterizes a

floating exchange rate regime.

If Mexico suffered from “fundamental disequilibrium,” and its government chose not to devalue its currency, a likely consequence would be

 

high unemployment.

Prior to the introduction of the euro, several member states of the European Union participated in a __________ system, in which the values of a set of currencies are fixed against each other at some mutually agreed upon exchange rate.

 

fixed exchange rate

The gold standard called for fixed exchange rates against the U.S. dollar.

 

false

Contracting out manufacturing allows companies to reduce economic exposure because

 

it allows companies to shift suppliers from country to country.

After World War II, the world’s major industrial nations arranged their currencies against each other at a mutually agreed on exchange rate. This is an example of a __________ system.

 

fixed exchange rate

The great virtue claimed for a __________ is that it imposes monetary discipline on a country and leads to low inflation.

 

pegged exchange rate

What was the World Bank’s initial mission?

 

providing low-interest loans to help finance the building of Europe’s economy

The value of the U.S. dollar increased between 1980 and 1985

 

despite running a growing trade deficit.

The fixed exchange rate system established at Bretton Woods failed due to speculative pressures on the U.S. dollar.

true

Currencies of countries with currency boards will become uncompetitive and overvalued if

 

local inflation rates remain higher than the inflation rate in the country to which the currency is pegged.

What is a disadvantage of using a rigid policy of fixed exchange rates?

 

It is likely to create high unemployment in some cases.

Countries that require substantial loans from the International Monetary Fund to survive will probably __________ due to IMF-mandated economic policies.

 

endure a sharp contraction of demand in the short term

A common criticism against the powerful International Monetary Fund is that the IMF

 

lacks any real mechanism for accountability.

Loans issued by the IMF

 

are conditional loans.

An underdeveloped nation has a poor credit rating and is considered a risky customer. Despite this, the World Bank will offer this country a low-interest loan.

True

It is difficult if not impossible to get adequate insurance coverage for exchange rate changes that

might occur several years in the future.

Advocates of a __________ argue that removal of the obligation to maintain exchange rate parity would restore monetary control to a government.

floating exchange rate regime

An effective business strategy to reduce economic exposure is to contract out high-value-added manufacturing.

false

Firms cannot utilize the forward exchange market when they are faced with uncertainty about the future value of currencies.

false

Which tactic will help a company hedge against currency fluctuations?

dispersing production to different geographic locations

Assume that a European nation operates under a fixed exchange rate regime. What would occur if this nation rapidly increased its money supply by printing more currency?

The prices of imports would become more attractive in the country.

A country wants to hold its currency against the U.S. dollar without a formal pegged rate. The central bank of the country will intervene in the foreign exchange market to maintain the value of its currency should it depreciate too rapidly against the dollar. This practice is known as

a managed float.

What will happen if a country increases its money supply rapidly under a fixed exchange rate regime?

The trade deficit would widen in that country.

Which statement is true of the Bretton Woods agreement?

All countries agreed to fix the value of their currency in terms of gold under the agreement.

A currency crisis results in a sharp depreciation of the value of the currency due to

a speculative attack on the exchange value.

Which argument strengthens the idea of floating exchange rates?

Trade deficits can be corrected through changes in exchange rates.

Responding to pressure for ________ requires that a firm differentiate its products and marketing strategy from country to country, even though it may raise costs.

 

being locally responsive

There is low interdependence, performance ambiguity, and costs of control in firms pursuing

 

a localization strategy.

The strategy, operations, and organization of a firm must all be consistent with each other if the firm is to ________ and achieve superior profitability.

 

attain a competitive advantage

When Casio sells its calculators in countries across the world, it doesn’t need to worry too much about customizing the product to local needs and preferences because calculators are a ________ need.

universal

Learning effects tend to be

 

more significant when a technologically complex task is repeated.

Pressures for cost reduction are intense in industries where

 

there is persistent excess capacity.

Trendy Wear for Teens is choosing to set up its new production facility in Indonesia in order to take advantage of low labor costs. Additionally, the Indonesian government will offer the company tax incentives if it locates its facility in Indonesia. By pursuing such a strategy, Trendy Wear for Teens hopes to realize

 

location economies.

Which statement reflects a problem that arises due to an international division structure?

 

The heads of foreign subsidiaries are not given as much voice in the organization as the heads of domestic functions or divisions.

It has been suggested that learning effects are important only during the start-up period of a new process and that they cease after two or three years. Any decline in the experience curve after such a point is due to

 

economies of scale.

When the need to integrate subunits is very high and complex, firms may

 

institute a matrix structure, in which all roles are viewed as integrating roles.

What is one of the five main arguments favoring decentralization?

 

It permits greater flexibility.

When a firm focuses on increasing profitability by customizing the product or service so that it provides a good match to tastes and preferences in different national markets, the firm is following ________ strategy.

 

a localization

What is a disadvantage of a worldwide area structure?

 

The structure encourages fragmentation of the organization into highly autonomous entities.

Which activity is most difficult for a leader?

 

changing an established organizational culture

The production department in charge of assembling water filtration systems is given a goal related to product quality—for each production run of 1,000 units, there can be no more than 2 defective or improperly assembled units. The performance of the department is based on this goal. This is an example of ________ control.

output

Firms usually respond to pressures for cost reduction by trying to

 

lower the costs of value creation.

According to researchers Bartlett and Ghoshal, for transnational enterprises to be successful, they must focus on

 

leveraging subsidiary skills.

A multinational firm may need to delegate marketing functions to national subsidiaries to

 

be responsive to local differences in distribution channels.

A firm pursuing ________ will have a strong incentive to decentralize decision making.

 

a localization strategy

Which statement is true of an international strategy?

 

The strategy is not viable in the long term.

In a ________, individual managers belong to two hierarchies (a divisional hierarchy and an area hierarchy) and have two bosses (a divisional boss and an area boss).

classic matrix structure

In firms pursuing ________, some operating decisions are relatively centralized, while others are relatively decentralized.

 

a transnational strategy

The distinguishing feature of many firms that pursue ________ strategy is that they are selling a product that serves universal needs, but they do not face significant competitors.

an international

A pharmaceutical firm wants to expand its offering by coming up with new drugs to treat Type II diabetes. What would be a primary activity for this firm?

research and development

A firm benefits by basing each value creation activity it performs at that location where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity. Firms that pursue such a strategy can realize

location economies.

In Firm A, each division is a self-contained, largely autonomous entity with full responsibility for its own value creation activities. What type of structure does Firm A employ?

worldwide product division structure

Michael Porter argues that

 

those firms that create superior value will achieve superior profitability.

A multinational enterprise doing business in Nigeria decided to change the labeling on its product to conform to local customs and preferences. What type of competitive pressure did this company experience?

pressure for local responsiveness

In a ________ strategy, the need for coordination between subunits is low and headquarters can manage foreign operations by relying primarily on output and bureaucratic controls and a policy of management by exception.

localization

A manufacturer of electric stand mixers wants to better compete in this highly competitive market. It decides to offer its mixer in over 50 different colors so customers will be able to match the appliance to their kitchen décor. What type of value creation strategy does this represent?

differentiation

Firms pursuing ________ strategy are more centralized than enterprises pursuing a localization or international strategy.

a global standardization

The worldwide product division structure

is weak in local responsiveness.

A potential drawback of the worldwide area structure is that this structure

makes it difficult to realize location and experience curve economies.

Which statement is true of export credit insurance?

 

The Foreign Credit Insurance Association provides coverage against commercial risks and political risks.

Naomi, the product line manager for a small family business believes that it is time for the company to begin exporting its product to foreign markets. Her father, the owner, is skeptical. To convince her father, Naomi points out that

 

firms that do not export often lose out on significant opportunities for cost reduction.

The great promise of exporting is that

 

large revenue opportunities are often found in foreign markets.

West Coast Lumbers, based in Oregon, has contracted with a company in Italy to export 1 ton of lumber. West Coast Lumbers has written an order requesting that the Italian company pay $20,000 by August 1 prior to the shipping date. This order is called a

 

draft.

A disadvantage of ________ is that the firm that enters into such an arrangement usually will have no long-term interest in the foreign country.

 

turnkey projects