International Economics Flashcards
Forward exchange contracts
Forward exchange contracts are agreements to exchange commodities in the future at an exchange rate set at the present.
effects of change in currency exchange rates
The effects of change in currency exchange rates on an outstanding account balance (e.g., accounts payable) should be recognized as a gain or loss for the period.
foreign currency forward exchange contract
A foreign currency forward exchange contract establishes a legal obligation to exchange currencies.
Exchange rate risk
The risk of loss because of fluctuations in the relative value of foreign currencies
-derives from changes in currency exchange rates that alter the value of future transactions
Political risk
Political risk is the risk related to actions by a foreign government, such as enacting legislation that prevents the repatriation of a foreign subsidiary’s profits or seizing a firm’s assets. Purchasing or selling futures contracts is designed to hedge transaction risks relating to foreign exchange rates.
A put is an option that gives its owner the right to
A put is an option that gives its owner the right to sell a specific security at fixed conditions of price and time. A put option is a contract that gives the owner the right, but not the obligation, to sell a specified amount of an underlying asset (e.g., security) at a specified price within a specified time.
international transfer pricing
I. Firms with operations in multiple nations can manipulate earnings through transfer pricing.
II. The transfer price preferred by a foreign subsidiary manager may be different than the transfer price that maximizes consolidated profits.
transfer pricing
The determination of the amounts at which transactions between affiliated entities will be recorded.
import quota
An import quota will restrict the quantity of a commodity that can be brought into the country from foreign providers.
This limitation on foreign quantity will enable domestic suppliers to sell more of the commodity produced domestically and at a higher price.
Freely fluctuating exchange rates
They automatically correct a lack of equilibrium in the balance of payments.
What is the effect when a foreign competitor’s currency becomes weaker compared to the U.S. dollar?
When a foreign currency becomes weaker compared to the U.S. dollar (or the dollar becomes stronger compared to the foreign currency), the U.S. dollar will exchange for more units of the foreign currency. As a result, dollars will buy more of the foreign competitor’s goods, giving the foreign company an advantage, not a disadvantage, in the U.S. market.
World Bank
The World Bank was established to promote general world‐wide economic development.
-makes loans to developing countries.
International Monetary Fund
The IMF maintains order in the international monetary system by providing funds to countries in financial crisis, including currency crisis, banking crisis, or debt crisis.
General Agreement on Tariffs and Trade (GATT)
GATT has as its primary purposes the liberalizing and encouraging international trade by eliminating tariffs, subsidies, import quotas, and other trade barriers, to harmonize intellectual property laws and to reduce transportation costs.
Foreign direct investment
Foreign direct investment involves investments in non‐monetary assets (e.g., property, plant, equipment, etc.) in a foreign location.
risk encountered when goods are outsourced to a foreign supplier and payment is denominated in the foreign supplier’s currency
Quality risk.
Security risk.
Currency exchange risk.
mitigate risks associated with outsourcing
Including an arbitration clause in the contract with the foreign supplier would mitigate the risk associated with outsourcing by providing a predetermined mechanism for resolving differences between the buyer and the supplier (Statement II). Negotiating for payment to the foreign supplier to be made in the foreign currency would not mitigate the risk because it would subject the domestic buyer to foreign currency exchange risk, i.e., the risk that changes in the exchange rate between the currencies will increase the cost of acquiring goods (Statement I).
If the dollar strengthens against a foreign currency, the dollar value of an investment denominated in the foreign currency will decline
True
Globalization of capital markets
- facilitates investment portfolio diversification
- concerned with international transactions in financial securities.
- can lower the cost of capital for borrowers.
- reduced investment portfolio risk
The value of international borrowing is greater than the value of international equity issues.
True
The Eurodollar market
- provides short‐term commercial loans.
- Eurodollars are measured in U.S. dollars.
Eurobonds
Eurobonds are not subject to extensive regulation like U.S. issued domestic bonds; therefore, they are less expensive to issue.
dollar changes against the foreign currency
If the dollar strengthens against a foreign currency, an investment denominated in that currency would result in fewer dollars; if the dollar weakens against a foreign currency, borrowing in that currency would cost more dollars, as more dollars would be required to service and repay the debt.
world‐wide output(GDP)
- World‐wide output is measured by summing the GDP of the world’s countries.
- The U.S. share of world‐wide output has decreased in the past 25 years.
- Over the past 30 years, Asian‐area countries have increased their share of world‐wide output.
- The U.S. share (percentage) of worldwide GDP (output) is approximately 25%. In 2012 the U.S. share of worldwide GDP was about 22%.
- Europe has had the greatest decline in share of worldwide output during this period
