Lecture 1

Question 1

What are the parts of the international product life cycle?

Answer 1

Company creates a product to accommodate local demand > company exports the product to accommodate foreign demand > company establishes foreign subsidiary to establish presence in foreign country and possibly reduce cost > The company may then succeed or fail in the new market.

Question 2

What are the main ways businesses could be international?

Answer 2

International trade, licensing products to a third party, franchising (an individual pays for right to use brand), joint ventures (one company joining another, acquisitions of existing operations, establishing new foreign subsidiaries.

Question 3

What is Direct foreign investing? What are the two main ways?

Answer 3

Any method of increasing international business that requires a direct investment in foreign engagements. The two main ways are acquisitions of existing operations, and establishing new foreign subsidiaries.

Question 4

What occurs to companies in a region if an economy weakens?

Answer 4

Less sales will occur at subsidiaries and less exports will occur, reducing cash flow for companies invested in the region, this could potentially weaken the economy of other countries the company is based in.

Question 5

What is the currency pair notation?

Answer 5

Unit currency/Quoted currency. This means that one unit of the unit currency is worth x many quoted currency.

Question 6

What are some of the main risks multinational companies face?

Answer 6

Exchange rate risk (possibly due to things like political risk), and economic uncertainty.

Question 7

What is a cryptocurrency?

Answer 7

A digital currency in which encryption techniques are used to regulate the generation of currency and verify fund transfer, they operate independently of a central bank by using a public ledger and “mining” to verify the transactions.

Question 8

What are some of the cryptocurrency benefits?

Answer 8

They facilitate payments of any value in real time, without transfer fees, they cannot be faked or reversed. They are faster and cheaper than bank transfers. They facilitate global remittance(sending of money globally), are safe money for the poor, increase e-commerce opportunities, and allow for programmable money and smart contracts.

Question 9

What is bimetallism and how did currency exchange work?

Answer 9

Bimetallism used varying types of valuable metal in their coins. Conversion was based on how much of the metal was in common between coins of different nations.

Question 10

What was the gold standard and how did currency conversion work? What was a main benefit? What was a main drawback?

Answer 10

The gold standard meant that money was backed by gold, being convertible into gold at a specified rate that varied based on the currency. Conversion was based on the gold that could be received in exchange. This backing by gold helpped make exchange rates stable, aiding international trade and investment. Money however, was tied to the amount of gold in a country.

Question 11

How did the gold standard correct for trade imbalances?

Answer 11

Trade imbalances would mean a net flow of gold from one country to another, the main exporter would therefore have inflation, increasing the price of goods in their country and the opposite would occur in the main importer. This would make the main importer’s goods cheaper to import, correcting the trade imbalance.

Question 12

How can weaker currencies help exporters?

Answer 12

They make products cheaper for countries with stronger currencies, increasing exports.

Question 13

What is the global capital market? What does it do?

Answer 13

A collection of institutions (banks), and securities, all linked via a global network known as the interbank market. This interbank market facilitates the exchange of currency, basing its pricings on LIBOR.

Question 14

What is FOREX? What is the spot market? How does the interbank market play a role?

Answer 14

The foreign exchange market, most trading is done using USD, and as it is based in currency it has a lot of liquidity. The transactions occur in the over the counter market. Meaning that individuals can trade directly with one another, though facilitators are common. Foreign exchange transactions for immediate exchange (instead of exchange at later dates) are done in the spot market, based on the exchange rate (spot rate).
Between banks the foreign exchange trading occurs in the interbank market.

Question 15

What are the BID and ASK rates with regards to currency exchange? How does this relate to what we pay? Which should be higher

Answer 15

The BID rate is the bank’s buy rate for that currency, the ASK rate is the bank’s SELL rate.
We buy at the bank’s SELL/ASK, we SELL as the bank’s BUY/BID. The ASK rate will be higher than the BID rate.

Question 16

What is the BID/ASK spread and spread percentage?

Answer 16

the bid ask spread is the difference between the ask rate and bid rate (ASK - BID), this difference covers the bank’s transaction costs. The spread percentage is the spread/ASK.

Question 17

How would we work out USD/NZD from NZD/USD?

Answer 17

Do the reciprocal, 1/NZD/USD. Also must reverse the quote order. E.g NZD/USD ASK 0.63335, BID 0.63314 becomes USD/NZD ASK 1/0.63314, BID 1/0.63335.

Question 18

What can the ASK BID Spread be affected by? How are these all related?

Answer 18

order costs (more expensive if currency pair is not often traded), recording of transactions, inventory costs, competition, volume of trade, political risk, and economic risk. All of these change the risk level the investor is exposed to.

Question 19

What is the standard currency used for quotation?

Answer 19

Currencies are often quoted in USD.

Question 20

What is a direct quotation and indirect quotation

Answer 20

A direct quotation like USD/NZD reports the value of a foreign currency in a domestic currency. An indirect quotation like NZD/USD reports the number of foreign currency per one unit of domestic currency.

Question 21

What is the cross exchange rate? How is it done, try get THB/PHP from THB/USD and USD/PHP.

Answer 21

The cross exchange rate is the exchange rate between currencies, given with respect to a third currency. THB/PHP = THB/USD*USD/PHP (just algebra).

Question 22

What are currency derivatives? What are some types?

Answer 22

Contracts with a price that is partially derived from the value of the underlying currency. There are several types:
Forward contract, an agreement between a foreign exchange dealer and a multinational corporation that specifies the currencies to be exchanged, the forward exchange rate, and the date of the transaction.
Futures contract, similar to a forward contract, but can be sold on an exchange. Specifies a standard volume of a particular currency to be exchanged on a specific settlement date at a stated futures rate.
Currency call (PUT) options, Gives the holder the right to buy (sell) currency at a specified strike price within a specified period of time.

Question 23

What does the international money market provide?

Answer 23

It provides corporations or governments with short-term funds denominated in a currency different from their home currency, it allows borrowing funds to pay for imports denominated in a foreign currency, allows choosing to borrow in a currency with a lower interest rate, or allows borrowing in a currency that is expected to depreciate against their home currency.

Question 24

What is LIBOR?

Answer 24

The London Interbank Offer Rate, is a rate used for very short term loans (e.g a day) between banks. It varies based on the supply and demand of currencies, and is used in all banks, not just those in London.

Question 25

What does the International credit market offer for Multi National corporations?

Answer 25

It is a source of medium term funds through term loans from local financial institutions or through issuance of notes (medium-term debt obligations) in their local markets. Banks commonly use floating rate loans with rates tied to LIBOR to avoid interest rate risk.

Question 26

What are syndicated loans?

Answer 26

Loans formed from the international credit market when no single bank can provide all the funding.

Question 27

What are four major regulations in the credit market?

Answer 27

Single European act: allows free flow of capital throughout Europe.
Basel Accord: Banks must maintain capital equal to 4% of their assets.
Basel II Accord: Improve controls for operational risk.
Basel III Accord: Required banks to maintain higher levels of capital.

Question 28

What is the international bond market? What is a eurobond?

Answer 28

A market wherein foreign bonds are issued by a borrower foreign to the country where the bond is placed. A eurobond is a bond sold in countries other than the country whose currency is used to denominate the bond.

Question 29

What risks are the international bond markets exposed to?

Answer 29

Interest rate risk- rising long-term interest rates.
Exchange rate risk- bond denomination currency depreciates against the home currency
Liquidity risk- there is no consistently active market for bonds
Credit risk- risk of defaulting.

Question 30

What is the international stock market?

Answer 30

Occurs when foreign firms issue stocks in markets other than their own.