1. Introduction

Question 1

New Zealand’s Largest Trade Partners (Top 5 Exports/Imports)

Answer 1

1. China
2. Australia
3. USA
4. South Korea
5. Japan (Exports), Singapore (Imports)

Question 2

New Zealand’s Largest Export Industry

Answer 2

Dairy

Question 3

History of Foreign Exchange (2)

Answer 3

1. Gold Standard - each currency convertible into gold at a specified rate, country with the most gold = most valuable, gold standard suspended in 1914 (start of WWI)
2. Floating Exchange Rate System - widely traded currencies able to fluctuate in accordance with market forces (determined by supply/demand)

Question 4

Global FOREX Market

Answer 4

Trades 24hr a day - active hours for major cities occur at different GMT (Greenwich Mean Time)

Question 5

Foreign Exchange Transactions occur…

Answer 5

Over the counter (OTC) - telecommunications network where companies exchange one currency for another

Question 6

Spot Market (3)

Answer 6

1. FOREX market for immediate exchange - traded at spot rate
2. US Dollar commonly accepted medium of exchange
3. Liquidity increases with more buyers and sellers

Question 7

Bid Rate

Answer 7

Banks BUY/my sell

Question 8

Ask Rate

Answer 8

Banks SELL/my buy

Question 9

Bid Ask Spread

Answer 9

Ask - Buy

Question 10

Bid Ask Percentage

Answer 10

Ask-Buy/Ask

Question 11

Bid-Ask Spread covers…

Answer 11

Banks cost of conducting FOREX transactions

Question 12

NZD in AUD

Answer 12

NZD/AUD

Question 13

CNY in NZD

Answer 13

CNY/NZD

Question 14

Japanese yen always quoted in…

Answer 14

100JPY

Question 15

Direct Quotation

Answer 15

Cost of one unit of foreign currency is given in units of local currency

Question 16

Indirect Quotation

Answer 16

Cost of one unit of local currency given in units of foreign currency

Question 17

Indirect Quotation =

Answer 17

1/Direct Quote

Question 18

Cross Exchange Rates

Answer 18

Exchange rate between currency A and B, given the values of A and B with respect to a third currency

Question 19

Currency Derivatives

Answer 19

Contracts with a price that is partially derived from the value of the underlying currency

Question 20

Forward Contract

Answer 20

Agreement between FOREX dealer and MNC that specifies:
- Currencies to be exchanged
- Forward exchange rate
- Date at which the transaction will occur

Question 21

Futures Contract

Answer 21

Sold on an exchange, specifying:
- Standard volume of particular currency to be exchanged
- Stated futures rate
- Specific settlement date

Question 22

Currency Call (Put) Options

Answer 22

Contract that gives the holder the right to buy (sell) currency at a specified strike price within a specified period

Question 23

Cryptocurrencies

Answer 23

Digital currencies in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds.

Question 24

Advantages of Crypto (5)

Answer 24

• Facilitates payments of any value
• Cannot be faked
• Safe money for the poor
• Faster, cheaper transfers

Question 25

International Money Market (IMM)

Answer 25

Provides corporations or government with short-term funds denominated in a currency different from home currency

Question 26

IMM has grown as firms may: (3)

Answer 26

• Need to borrow funds to pay for imports in foreign currency
• Choose to borrow in a currency in which the interest rate is lower
• Choose to borrow in a currency that is expected to depreciate against their home currency

Question 27

London Interbank Offer Rate (LIBOR) (2)

Answer 27

• Rate for very short-term loans (1 day) between banks
• Varies based on supply and demand of currencies

Question 28

International Credit Market

Answer 28

Source of medium-term funds for MNC’s through:
- Term loans from local financial institutions
- Issuance of notes (med-term debt obligations) in local markets

Question 29

To avoid interest rate risk in the International Credit Market banks commonly…

Answer 29

use floating rate loans with rates tied to the LIBOR

Question 30

Syndicated loans are formed in the international credit market when…

Answer 30

No single bank can provide all the funding

Question 31

Regulations in the Credit Market (4)

Answer 31

• Single European Act - Capital can flow freely throughout Europe with any one bank in the EU able to expand into any or all of the other EU countries
• Basel Accord - banks must maintain capital equal to at least 4% of their assets
• Basel II Accord - improve controls for operational risk
• Basel III Accord - required banks to maintain higher levels of capital

Question 32

International Bond Market

Answer 32

• Bond Market Yields are highly correlated
• Demand for borrowed funds fluctuates with economic conditions

Question 33

Risks in International Bond Market (4)

Answer 33

Interest rate - rising long-term interest rates
Exchange Rate Risk - bond denomination currency depreciates against home currency
Liquidity - no consistently active market for bonds
Credit - default (govt debt is not always risk free)

Question 34

International Stock Markets

Answer 34

US firms may issue stock in foreign markers, foreign firms may issue stock in US markets

Question 35

Yankee Stock Offerings

Answer 35

Non-US firms that issue shares in the US (NYSE or NASDAQ)

Question 36

American Depository Receipts (ADRs)

Answer 36

Certificates representing bundles of stock, can be traded like shares

Question 37

Sarbanes-Oxley Act (SOX)

Answer 37

Many new issues of stock were listed in the UK rather than US to avoid compliance with new law)

Question 38

International Stock and Credit Markets are integrated!…

Answer 38

INTEGRATED!