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1 international finance > IF EXAM > Flashcards

IF EXAM Flashcards

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1
Q

Why’s it important to understand international finance?

A

Investors: make decisions based on exch rates etc
G.ments: make changes and dont repeat mistakes
MNC’s : manage money and risk internationally

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2
Q

recent IF trends

A

MNC’s rising, conducting business in multiple countries. Free trade agreements such as EU, single market and NAFTA helped with this

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3
Q

what is triangular arbitrage?

A

an arbitrage process involving three currencies

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4
Q

Problems from investing internationally

A

euro restricted greek and italian governments ability to respond to economic problems. Western companies (MNC’s) take advantage of cheap labour overseas. Causes lack of employment in mid west america and northern england.

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5
Q

If currency weakens e.g. 5%

A

Current currency * 95%

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6
Q

Chinas current account

A

Surplus. Exports are competitive but currency is undervalued. High prices for chinese consumers.
Future it may be pressured to revalue as other countries feel its exch rate puts their own products at a competitive disadvantage

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7
Q

UK’s Current account

A

Deficit. increasing debt, which is unsustainable/ increasing foreign ownership of domestic assets. Could cause problems in the future due to potential for capital flight.

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8
Q

what does a premium mean for the forward and spot price

A

premium in forward market means forward market price is LARGER than spot price

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9
Q

ways to combat a forced devaluation

A

sell reserves
raise interest rates
use capital controls
tax/subsidise international trade to influence demand for foreign currency

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10
Q

advantages of fixed exchange rate

A

provide microeconomic benefits, reduce transaction exch risk, bis asks spreads and uncertainty . May also aid gment in pursuing a policy e.g. export led growth

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11
Q

disadvantages of fixed exchange rate

A

hamstring monetary policy, lead to macroeconomic policy, require capital controls that are unpopular and difficult to implement

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12
Q

target zone

A

implies central bank intervention to keep the exch rate within a certain range

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13
Q

crawling peg

A

implies central bank intervention to keep the exch rate movements below a certain level

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14
Q

optimum currency area

A

the region that best balances the microeconomic benefit of a SINGLE currency w/ the macroeconomic problems.

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15
Q

downsides of optimum currency area

A

small currency area is costly

large currency area can cause severe regional recessions, especially if theres no political union

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16
Q

inter war gold standard

A

abandoned due to monetary policy being implemented to sustain international monetary systems. Governments chose instead to carry out monetary policy to suit their own best interests.

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17
Q

eurozone future

A

Eurozone similar to gold standard.
If no political union countries may leave as it wont serve their best interests.
Italy and Greece want to leave.

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18
Q

impossible trinity of exchange rate systems problem

A

only 2 / 3 are possible
perfect capital mobility
fixed exchange rates
domestic monetary autonomy

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19
Q

impossible trinity of exchange rate systems explained

A

perfect capital mobility requires a floating exchange rate or use of monetary policy to fix exch rate.
monetary autonomy requires leaving exch rate

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20
Q

rodriks political trilemma problem

A

democracy
national sovereignty
deep global economic integration

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21
Q

rodriks political trilemma explained

A

economic integration requires EU to be federal like US, this means no national sovereignty. National sovereignty means making own laws. Democracy, means people vote for their own interests.

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22
Q

a straight bond

A

fixed coupon payment and final payment at maturity

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23
Q

floating rate note

A

floating interest rate varies w/ short term libor

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24
Q

convertible bonds

A

allow holder to convert the bonds into a stock and have an option feature

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25
Q

managers inclined to hedge foreign currency risk?

A

want to avoid downside risk as if bankruptcy occurs they lose their jobs

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26
Q

M&M argument hedging is irrelevant

A

say shareholders can make or undo hedge according to their own preference

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27
Q

violation of M&M hedging theory

A

hedging reduces the risk of bankruptcy costs (admin and legal costs) hedging also gives tax benefits

28
Q

burst of an international finance bubble cause problems for domestic banks

A

causes asset prices to drop, creates BS problems for banks (L>A). Causing a bankruptcy chain on other banks.
Gment may increase pressure by raising interest rates.

29
Q

one segment of international bond market

A

foreign bond market
subject to local regulations
foreigner issues bonds in a domestic bond market

30
Q

second segment of international bond market

A

eurobond market
bonds issued simultaneously in various markets
not subject to any regulation

31
Q

public bourse

A

gment appoints brokers and ensures a monopoly (deregulation in 80s/90s means most bourses are private)

32
Q

private bourse

A

owned and operated by a corporation for trading securities

33
Q

price driven system

A

dealers stand ready to buy at a bid price and sell at an ask price

34
Q

order driven system

A

share prices are determined in an auction using S and D of shares

35
Q

advantages of cross listing shares

A

lower cost of capital
improve liquidity
better corporate governance
provide access to foreign capital

36
Q

one reason for int banking reg

A

central banks need a framework to make sure good level of capital is maintained. (bank failures = financial crisis)

37
Q

another reason for int banking reg

A

diff national regulations gives advantages to other countries. Int reg creates an even playing field for competition.

38
Q

consequences of currency crises

A

devaluation led recovery
financial crisis
recession

39
Q

why do currency crises vary

A

based on vulnerability of domestic banking sector.

domestic governments management of currency.

40
Q

info to determine appreciation or depreciation of a floating currency

A

empirically, the forward rate.

Also PPP rates and expected inflation.

41
Q

usefulness of technical analysis of international parity

A

Not useful.

information on previous rates doesn’t help predict accurately future rates.

42
Q

three methods of predicting exchange rates

A

Technical analysis
PPP
Market based

43
Q

predicting exch rates TA

A

attempting to find patterns in previous movements

44
Q

predicting exch rates PPP

A

assume that market exch rate will tend towards PPP

45
Q

predicting exch rates MB

A

look at the forward rates to predict

46
Q

market forces preventing PPP in real economics

A

adjustment for inflation
sticky prices
variation in forex rates
differential taxes, tariffs and transaction costs

47
Q

what is relative PPP

A

theory suggest exch rates adjust in response to differences in inflation rates

48
Q

URIP definition

A

links expected exch rate and interest rate differentials

49
Q

CIRP definition

A

links forward rates, spot rates and interest rate differentials

50
Q

URIP Vs CIRP

A

CIRP is more likely to hold because all aspects are observable and so arbitrage can be exploited

51
Q

order driven vs price driven

A

order driven is easily automated and uses a computer to determine equillibrium price

52
Q

disadvantages of hedging equity risk

A

spread reduced due to long hedge

benefits for risk management are small

53
Q

advantages of hedging equity risk

A

tax benefits

losses can be offset

54
Q

law of one price

A

an ideal market where everything costs the same everywhere

55
Q

violations of law of one price

A

tariffs and quotas
transaction costs
noncompetitive markets
sticky prices

56
Q

peso problem

A

possibility that infrequent or unprecedented event may occur affects asset prices

57
Q

forward>spot

A

premium

58
Q

forward less than spot

A

discount

59
Q

premium/discount rate %

A

forward-spot/spot * 360/n *100

60
Q

$/E spot value date

A

2 days

61
Q

settlement of contracts

A

+ 1 day

62
Q

forward rates 50/48

A

when first is > then you subtract

63
Q

forward rates 48/50

A

when first is smaller then you add

64
Q

home bias

A

investors have not fully internationally diversified.

heavily invested in own stock markets

65
Q

decline of home bias

A

no barriers to international investment

66
Q

home bias re emergence

A

2008/9 financial crisis caused austerity and increased home bias

1 international finance (1 decks)

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