1Production of goods and services has become globalized to a large extent as a result of
multinational corporations' efforts to source inputs and locate production anywhere where costs are lower and profits higher
2Recently, financial markets have become highly integrated. This development
allows investors to diversify their portfolios internationally
3Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian government has expropriated your firm's assets paying only €80,000 in compensation. This is an example of
political ris
4Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of value is an example of
exchange rate risk
5Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso appreciates drastically against the U.S. dollar. This means
your firm will be able to charge more in dollar terms while keeping peso prices stable and your domestic competitors will enjoy a period of facing lessened price competition from Mexican imports
6The international monetary system can be defined as the institutional framework within which
-international payments are made
-movement of capital is accommodated
-exchange rates among currencies are determined
7The monetary system of bimetallism is unstable. Due to the fluctuation of the commercial value of the metals,
the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law)
8One potential drawback of the gold standard is that
the world economy can be subject to deflationary pressure due to the limited supply of monetary gold
9Assume that a country is on the gold standard. In order to support unrestricted convertibility into gold, banknotes need to be backed by a gold reserve of some minimum stated ratio. In addition,
the domestic money stock should rise and fall as gold flows in and out of the country
10Corporations today are operating in an environment in which exchange rate changes may adversely affect their competitive positions in the marketplace. This situation, in turn, makes it necessary for many firms to
carefully manage and measure their exchange risk exposure
11Balance of payments
-is defined as the statistical record of a country's international transactions over a certain period of time presented in the form of a double-entry bookkeeping
-provides detailed information concerning the demand and supply of a country's currency
-can be used to evaluate the performance of a country in international economic competition
12Generally speaking, any transaction that results in a receipt from foreigners
will be recorded as a credit, with a positive sign, in the U.S. balance of payments
13If the United States imports more than it exports, one possible outcome is the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris parius
true
14The current account balance, which is the difference between a country's exports and imports, is a component of the country's GNP. Other components of GNP include
consumption and investment and government expenditure
15A country's international transactions can be grouped into the following four main types:
current account, capital account, financial account, and official reserve account
16On average, worldwide daily trading of foreign exchange is closest to
$6.19 trillion
17Most foreign exchange transactions are for
interbank trades between international banks or nonbank dealers
18Intervention in the foreign exchange market is the process of
a central bank buying or selling its currency in order to influence its value
19The spot market
involves the almost-immediate purchase or sale of foreign exchange
20The two main reasons that IRP may not hold precisely at all time, especially over short periods is:
transaction costs and capital controls
21Covered Interest Arbitrage (CIA) transactions will result in
restoring equilibrium prices quickly