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Special Topic > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Government fix their currencies value usually in terms of another currency such as the us dollar

A

Fixed- rate system

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2
Q

These are businesses that operates in many different countries

A

Multinational corporations

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3
Q

The price of one currency in terms of another currency

A

Exchange rate

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4
Q

an exchange rate system in which a currencies value is allowed to fluctuate in response to market forces

A

Floating exchange rate

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5
Q

An exchange rate system in which the price of one currency is fixed relative to another currency by government authorities

A

Fixed exchange rate

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6
Q

A hybrid currency system in which a government loosely fixes the value of the national currency relative to one or more other currencies

A

Managed floating rate system

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7
Q

The six major currencies in international finance

A

British pound sterling
swiss franc
japanese yen
canadian dollar
us dollar
euro

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8
Q

An exchange rate system in which each unit of the domestic currency is backed by a unit of some foreign currency

A

Currency board arrangement

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9
Q

An exchange rate quoted in terms of units of domestic currency per unit of foreign currency

A

Direct quote

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10
Q

This will happen to a currency when it buys less of an other currency than it did previously

A

Depreciate

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11
Q

An exchange rate quoted in terms of foreign currency per unit of domestic currency

A

Indirect quote

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12
Q

This will happen to the currency when it buys more of an other currency than it did previously

A

Appreciate

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13
Q

This is the exchange rate that applies to immediate currency transactions

A

Spot exchange rate or current exchange rate

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14
Q

The exchange rate quoted for a transaction that will occur on a future date

A

Forward exchange rate

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15
Q

When one currency buys more of another on the forward market than it buys on the spot market

A

Forward premium

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16
Q

When one currency buys less of another on the forward market than it buys on the spot market

A

Forward discount

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17
Q

It gives traders information about more than just the price of exchanging currencies at a different points in time

A

Forward discount or premium

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18
Q

This is tightly linked to differences in interest rates on short-term low risk bonds across countries

A

Forward premium

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19
Q

An exchange rate between two currencies calculated by taking the ratio of the exchange rate of each currency expressed in terms of a third currency

A

Cross exchange rate

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20
Q

A trading strategy in which trades by a currency in a country where the value of the currency is too low and immediately sell the currency in another country where the currency value is too high

A

Triangular arbitrage

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21
Q

This is not actually a physical exchange but a global telecommunications market

A

Foreign exchange market

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22
Q

This is the world’s largest financial market

A

Foreign exchange market

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23
Q

The five major dealing centers

A

Singapore bahrain continental europe london north america

24
Q

Trading is more constrained and regulated and frequently involves a national government as counterparty on one side of the trade

A

Fix rate currency

25
Q

What are the six market participants

A

Exporters and importers investors hedgers speculators dealers government

26
Q

They trade foreign currency when they seek to buy and sell financial assets in foreign countries

A

Investors

27
Q

Trading an asset for the sole purpose of reducing or eliminating the risk associated with some other asset

A

Hedging

28
Q

They influenced currency values when they take a positions to offset the risk of the existing exposures to certain currencies

A

Hedgers

29
Q

They sell a currency if they’re expected to depreciate and they buy if they expect it to appreciate

A

speculators

30
Q

They help make the foreign currency market more liquid and more efficient

A

speculators

31
Q

They play a crucial role in the foreign exchange business

A

Dealers

32
Q

It is the price at which a currency dealer is willing to sell foreign currency

A

Ask price

33
Q

This is the price at which the dealer is willing to buy currency

A

Bid price

34
Q

This intervene in financial markets to put upward or downward pressure and currencies as circumstances dictate

A

Governments

35
Q

The parity conditions in international finance

A

Forward spot parity
purchasing power parity
interest rate parity
real interest rate parity or the fisher effect

36
Q

When markets are in equilibrium this should be linked across countries

A

Spot and forward exchange rates interest rates inflation rates

37
Q

An equilibrium relationship that predicts that the current forward rate will be an unbiased predictor of the spot rate on a future date

A

Forward spot parity

38
Q

An equilibrium relationship that predicts that currency movements are tied to differences and inflation rates across countries

A

Purchasing power parity

39
Q

A theory that says that the identical good trading in different markets must sell at the same price

A

Law of one price

40
Q

An equilibrium relationship that predicts that differences in risk-free interest rates in two countries must be tied to differences in currency values on the spot and forward markets

A

Interest rate parity

41
Q

Trading strategy designed to exploit deviations from interest rate parity to earn an arbitrage profit

A

Covered interest arbitrage

42
Q

An equilibrium relationship that predicts that the real interest rate will be the same in every country

A

Real interest rate parity or the fisher effect

43
Q

What are the four financial and political risk

A

Transaction risks
translation and economic risk
political risk
european monetary union and the rise of regional trading blocs

44
Q

This exchange rate risk cannot be eliminated but it can be hedge using financial contracts

A

Transactions risk

45
Q

The risk that movements and exchange rate will adversely affect the value of a particular transaction

A

Transactions exposure

46
Q

The race that exchange rate movements will adversely impact reported financial results on a firm’s financial statements

A

Translation exposure or accounting exposure

47
Q

The risk that a firm’s value will fluctuate due to exchange rate movements

A

Economic exposure

48
Q

These are yen denominated bonds issued by non-japanese corporations

A

Samurai bond

49
Q

The risk that a government will take an action that negatively affects the values of firms operating in that country

A

Political risk

50
Q

The two basic dimensions of political risk

A

Macro political risk and micro political risk

51
Q

This means that all foreign firms in the country will be subject to political risk because of political change revolution or the adoption of new policies be a host government

A

Macro political risk

52
Q

This refers to a foreign government targeting punitive action against an individual firm a specific industry or company’s from a particular foreign country

A

Micro political risk

53
Q

The currency used throughout the countries that make up by the european union

A

Euro

54
Q

An agreement between many european countries to integrate their monetary systems including using a single currency

A

Monetary union

55
Q

A trade treaty that extends free trade principles to broad areas of economic activity in many countries

A

General agreement on tariffs and trade or GATT

56
Q

An organization established by GATT to police world trading practices and to settle disputes between GATT member countries

A

World trade organization

57
Q

The two long term investment decisions

A

Capital budgeting cost of capital

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