BEC Custom 5 Flashcards
Import Quota
restricts the quantity of goods that can be imported
Import Tariff
Taxes on imported goods that increases cost in domestic market
Currency Exchange Rate
price of one unit of a country’s currency expressed in units of another country’s currency
- $1.00 = .80 Euro
- 1.00 Euro = $1.25
Balance of Trade
- difference between money value of imports and exports
- exports > imports = trade surplus
- exports < imports = trade deficit
Balance of Payments Issue
- summary accounting of U.S.-base transactions with all other countries during a period of time
- balance of payments accounts: current account, capital account, and financial account
Current Account (Balance of Payments)
net dollar value for period of:
- amounts earned from export of goods and services
- amounts spent on import of goods and services
- income from foreign investments - dividends and interest
- net factor flow from foreign aid and grants
SUM = Net Balance
Capital Account (Balance of Payments)
net dollar value for period of:
- inflows from investments and loans by foreign entities
- outflows from investments and loans by U.S. entities made abroad
- reflects net change in foreign ownership of U.S. assets and U.S. ownership of foreign assets
Financial Account (Balance of Payments)
net dollar amount of:
- U.S. owned assets located abroad
- Foreign-owned assets in the U.S.
- shows accumulated amount of investments:
- both government and private
- monetary and non-monetary
Direct exchange rate
Expresses the domestic price of one unit of a foreign currency
1 Euro = $1.10
Indirect exchange rate
Foreign price of one unit of a domestic currency
$1.00 = .909 Euro
Free-floating currency
exchange rate is determined by market forces of supply and demand for a currency
Pegged or Movable currency
exchange rate is fixed by the government, with frequent revisions
Transaction Risk
The possible unfavorable impact of changes in currency exchange rates on transactions that are denominated in a foreign currency
Foreign Currency Exchange Rate Hedging
Hedging is a risk management strategy that involves using offsetting or contra transactions so that a loss on one would be offset by a gain on the other
Translation Risk
The possible unfavorable impact of changes in currency exchange rates on financial statements of foreign operation that are converted from a foreign currency to the domestic currency
Economic Risk
The possibility that changes in exchange rates will alter value of future revenues and costs
How can a firm mitigate economic risk?
- distribute productive assets in different countries with different currencies
- shift sources of revenues and expenses to different locations with different currencies
Foreign currency forward exchange contract
A contract to buy or sell a specified amount of a foreign currency at a specified date at a specified rate
Foreign currency option contract
A contract that gives the right to buy or sell a specified amount of a foreign currency for a specified time at a specified rate
In practice, what may transfer price be based on?
- cost to the selling unit - either variable or full cost
- market price - the price of such goods or services in the market, if available
- negotiated price - between buying and selling units