MULTINATIONAL FINANCIAL MANAGEMENT Flashcards
is a firm that operates in an integrated fashion in a number of countries.
Multinational (Global) Corporation
is the framework within which exchange rates are determined.
It is also the blueprint for international trade and capital flows.
The international monetary system
is the number of units of a given currency that can be purchased for one unit of another currency.
Exchange Rate
is the quoted price for a unit of foreign currency to be delivered “on the spot,” or within a very short period of time.
Spot Exchange Rate
is the quoted price for a unit of foreign currency to be delivered at a specified date in the future.
Forward Exchange Rate
is set by the government and allowed to fluctuate only slightly (if at all) around the desired rate, called the par value.
Fixed Exchange Rate
is one that is not regulated by the government, so supply and demand in the market determine the currency’s value.
Floating or Flexible Exchange Rate
is the technical term referring to the decrease or increase in the par value of a currency whose value is fixed. This decision is made by the government, usually without warning.
Devaluation or Revaluation of a currency
refers to a decrease or increase in the foreign exchange value of a floating currency. These changes are caused by market forces rather than by governments.
Depreciation or Appreciation of a currency
is one that is expected to depreciate against most other currencies or else is being artificially maintained at an unrealistically high fixed rate by the government through open market purchases.
Soft or Weak Currency
is expected to appreciate against most other currencies or else is being artificially maintained by the government at an unrealistically low fixed rate.
Hard or Strong Currency
occurs when the exchange rate is determined by supply and demand for the currency.
Freely-Floating Regime
Floating rate regime:
most extreme position for the country is to have no local currency of its own.
No local currency
Fixed exchange rate regimes:
occurs when there is significant government intervention to control the exchange rate via manipulation of the currency’s supply and demand.
Managed-Float Regime
Floating rate regime:
occurs when a country has its own currency but commits to exchange it for a specified foreign money unit at a fixed exchange rate and legislates domestic currency restrictions, unless it has the foreign currency reserves to cover requested exchanges.
Currency Board Arrangement
Fixed exchange rate regimes:
occurs when a country locks its currency to a specific currency or basket of currencies at a fixed exchange rate. The exchange rate is allowed to vary only within 1 percent of the target rate.
Fixed Peg Arrangement
Fixed exchange rate regimes:
is a foreign exchange rate quotation that represents the number of American dollars that can be bought with one unit of local currency.
American Terms
Foreign Exchange rate Quoations
is a foreign exchange rate quotation that represents the units of local currency that can be bought with one U.S. dollar. “European” is
intended as a generic term that applies globally.
European Terms
Foreign Exchange rate Quoations
is the home currency price of one unit of the foreign currency.
Direct Quotation
Foreign Exchange rate Quoations
is the foreign currency price of one unit of the home currency.
Indirect Quotation
Foreign Exchange rate Quoations
is the exchange rate between any two currencies. It involves two
foreign currencies and is derived from their rates against a third currency
Cross Rate
Foreign Exchange rate Quoations
is the effective exchange rate of a foreign currency for delivery on (approximately) the current day or “on the spot”.
Spot Rate
is an agreed-upon price at which two currencies will be exchanged at some future date.
Forward Rate
is the situation when the spot rate is less than the forward rate.
Discount on Forward Rate
is the situation when the spot rate is greater than the forward rate.
Premium on Forward Rate
It specifies that investors should expect to earn the same return in all countries after adjusting for risk. A principle that holds the relationship between spot and forward exchange rates and interest rates.
Interest Rate Parity
is the relationship in which the same products cost roughly the same amount in different countries after taking into account the exchange rate.
Purchasing Power Parity (PPP)
Sometimes referred to as the law of one
price
Countries with higher inflation generally have higher interest rates to compensate lenders for the declining purchasing power of money.
Higher Inflation:
Countries with lower inflation typically have lower interest rates, as there is less need to compensate for depreciation in purchasing
power.
Lower Inflation:
Currencies of countries with higher inflation than the U.S. will likely depreciate over time against the dollar.
Higher Inflation Rates:
Currencies of countries with lower inflation than the U.S. tend to appreciate over time against the dollar.
Lower Inflation Rates:
Certificates representing ownership of foreign stock held in trust.
American Depository Receipts (ADRs)
are known as portfolio investments, and they are distinguished from direct investments in physical assets by U.S. corporations.
Security investments
is a floating-rate bank loans, available in most major trading currencies, that are tied to LIBOR.
- Eurocredits
3 Major Types
International Credit Markets
is an international bond underwritten by an international syndicate of banks and sold to investors in countries other than the one in whose money unit the bond is denominated.
Eurobond
3 Major Types
International Credit Markets
is a U.S. dollar deposited in a bank outside the United States.
Eurodollar
3 Major Types
International Credit Markets
is the interest rate offered by the largest and strongest
London-based banks on large deposits.
LIBOR
is a type of international bond issued in the domestic capital market of the country in whose currency the bond is denominated, and underwritten by investment banks from the same country.
Foreign Bond
