International Finance

Chapter 2 Questions

  1. What is the summary of all international transaction for a particular country over a period of time? Answer: Balance of Payments

  2. What do we call Exports-Imports? Answer: Balance of Trade

  3. An increase in a use in quotas is expected to have what type of effect on the current account balance? Answer: If we increase quotas, the current accounts is expected to go up

  4. If a country removes tariffs on imported goods, what will happen to the current account? Answer: The Current Account will go down

  5. What is investment in fixed assets in foreign countries that can be used to conduct business operations? Answer: Direct Foreign Investment

  6. What is it called when you subcontract to a third party to provide supplies or services that were previously obtained internally? Answer: Outsourcing

  7. True or False: Outsourcing allows a MNC to reduce costs, but to ship jobs to other countries, which can be controversial? Answer: True

  8. Which trade agreement between 117 countries calls for lower tariffs around the world? The world trade organization is part of this agreement: Answer: General agreements on tariffs and trade

Chapter 3:

Foreign Exchange Market

Gold Standard- each currency was convertible into gold

Chapter 3 Questions

  1. T o F: Under the gold standard, each currency was able to be converted to gold at a specific rate and the exchange rate between two currencies was determined by their relative convertibility: True

  2. What is the name of the exchange used for the immediate exchange of currencies: SPOT rate

  3. If a currency is illiquid, will it be able to purchase quickly or with difficulty. Will it have a high premium or a low premium

  4. A bank’s bid rate on Swiss franks is .45 and asking rate is .47. What is the bid ask spread percentage? .47-.45/.47= 4.26%

  5. A Japanese Yen is worth .0080 and a Fijian dollar is worth .5900. How do we find the value of Yen in the Fijian dollars:

  6. How do we find the value of the Fijian dollar in Yen

  7. The strike price in the currency option is also known as: Exercise price

  8. If companies can’t rely on the stock market to obtain funds, what can they rely on instead to obtain long term funds? The bond market

  9. Contagion effects represent a decline in the stock market and the effects are isolated in that market: False

  10. What are different ways to invest internationally: Buy a MNC, purchase American depository receipts, international ETFs and Mutual Funds

  11. Do shareholders have the same voting power in all countries: No

  12. Is government enforcement laws the same across all countries: No, they differ country to country

Chapter 4 Questions

  1. Do govt controls only effect currency or can they affect demand? The can effect both

  2. What 5 factors cause currency supply to change: Inflation, interest rate, national income, govt controls, expectation of future exchange rates

  3. Assume US inflation is expected to surge relative to inflation levels of other currencies. What does it do?: Downward pressure

  4. Does a currency’s liquidity affect the extent to which speculation can impact it?: Yes, liquidity and sensitive are negatively correlated

Chapter 5

  1. Since corporations have specialize needs, what type of contract do they use for hedging? Forward contract

  2. The one forward rate of the BP is quoted at a 1.60 and the spot rate is quoted at 1.63. Is there a forward discount or a forward premium and how much is it? Discount of $0.03 or 1.8%

  3. The writer or seller of a call option is obligated to sell the underlining currency to the buyer of the option if the option is exercised: True

  4. What would make the premium of a currency put option increase? Increased volatility of currency, increased time to exploration, and a smaller difference between the spot and the strength prices

  5. If the spot rate of the Euro increases substantially over one month, what would the future’s price on the Euro likely do to the Euro?: Increase substantially

Chapter 6 Questions

  1. Assume the Fed intervenes by exchanging dollars for Euros in the foreign exchange, this will cause what type of shift in the demand for Euros: Outward shift in demand

  2. ToF: An example of direct intervention by the Japanese bank would be for the bank to use interest rates to increase the value of the Yen against the dollar: True

  3. If a foreign country experiences a reduction in interest rates relative to US interest rates and there’s no change in inflation, the foreign investors will do what? Increase their investments in US securities. This will cause what pressure on the foreign currency equilibrium? Downward

  4. ToF: If the british govt desires an appreciation in respect to the US, it would consider intervening in the foreign exchange market by buying dollars with pounds: False

  5. Having a single monetary policy, means any single Eurozone country does not have it the ability to solve its local economy problems with a unique policy: True

Study Guide

  • 3 market theories

  • Know the valuation equation for an MNC

  • 3 risk areas that international business is exposed to: Foreign economy, exchange rate, and political risk

  • Summary of transactions between domestic and foreign residents for a specific

    country over a specified period of time.

  • Difference between balance in trade and payments

  • What makes the current account go up and down: If imports go up, CA goes down

  • What a DFI is

  • What is GAAT

  • Know the bid-ask equation= ask-bid/ask

  • Be familiar with ways of international investments

  • Know how to calculate cross-exchange rates

  • Know the five factors that influence supply and demand: Chapter 4

  • Know the relationship between liquidity and the spot market and sensitivity of the exchange rate: More liquid, less sensitive

  • Know future contract, forward contracts

  • Know how currency and call options work and their 3 factors influence their premiums: Spot and strike differentials, timed expiration, and volatility

  • Know how to calculate premium/discount and analyze it: Chapter 5 forward-spot/forward 360/days in forward rate

  • Know the changes in the spot rate impact the future price: If the spot price increases, then the future price increases

  • benefits and drawbacks of the Euro: easier trade, no exchange rate, a single monetary policy so a local government can’t change interest rate

  • Know about direct intervention vs indirect and give an example: Direct is buying or selling currency. Indirect is changing any one of the 5 factors

  • 5 factors: Inflation, Interest rate, national income, govt controls, and expectations of a future exchange rates.

Chapter 7

  1. What are the 3 types of arbitrage: Locational, triangular

  2. For locational arbitrage, one bank’s ask rate must be higher than another’s bid rate: False

  3. Locational arbitrage involves investing in a foreign country and covering against foreign exchange rate risk in engaging in forward contract: False

  4. If interest rate parody exists, is covered interest arbitrage feasible: No

  5. If interest rate parody doesn’t hold, there is still the possibility that covered interest arbitrage is not worth while because of such factors as transaction cost, currency restrictions, and differential tax laws: True

Chapter 8 Questions

  1. Assume the US inflation is higher than NZ, this will cause US consumers to do what with their imports from NZ. We will increase products from NZ. NZers won’t buy American. The NZ dollar will appreciate

  2. Under purchasing power parody, the future spot exchange rate : The inflation diff

  3. According to PPP, if a foreign country’s Inflation Rate is below home’s inflation, hone country consumers will increases imports from the foreign country and vice versa. These cause the foreign currency to do what? Appreciate.

  4. Latin American countries have experienced high inflation, and their currencies have been depleted. This information is consistent with which theory: PPP

  5. ToF: PPP focuses on the relationship between nominal IR and exchange rates between 2 countries: False

  6. Because there are no substitutes for traded goods, what does this do to the probability of PPP: It reduces the PPP

  7. ToF: According to the Eye of Eve theory, when the nominal IR exceeds at home the foreign nominal rate, the home currency should appreciate and the foreign should depreciate: True

  8. Assume US Interest Rate is 11% while Australia has 12%. Based IFE, what should happen to the Australian dollar? The Australian dollar should depreciate

Chapter 9 Questions

  1. Is fundamental forecasting used for the short term or the long term?: longer term

  2. Is technical forecasting used for short or long term: Shorter term

  3. ToF: In general, any key managerial decision that is based on forecasted exchange rates should not rely completely on one forecast: True

  4. ToF: it’s best to utilize alternative exchange rate scenario so its best to utilize multiple forecast :True

  5. Even the hardest forecasting technique won’t be accurate, no matter how how sophisticated, a forecast isn’t always right: True

  6. A forecast of a currency, on year in advance, is typically more or less accurate than a forecast one week in advance: Less accurate

  7. What two factors increase forecasting error? Longer time horizon and higher volatility in the currency

  8. ToF: The absolute forecast error of a currency is lower on average in periods when the currency is more stable: True

  9. In terms of reading a forecast line, if points are scattered evenly on either side, then the forecast appears what?: Inaccurate

Exam 2:

  • 25 questions

  • 18 multiple choice

  • 7,8,9 chapters

  • Calculate cross exchange rates.

  • three types of arbitrage and definition

  • Review all the board notes from chapter 7

  • Cross exchange rate

  • Interest rate theory parity (understand premiums and discounts)

  • Theory of purchasing power parity

  • Understanding the theory of the international fisher effect

  • Know the five major reasons for forecasting exchange rates

  • Know when an MNC will expedite

  • Know the 4 forecasting techniques

  • Know the two factors that increase forecasting error

  • Know how to read a graph with the forecast line