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| the price of one currency expressed in terms of another-varies over time. It links different national currencies so that buyers and sellers can make international price and cost comparisons. The values of these national currencies, and thus their exchange rates, fluctuate constantly. This fluctuation means managers must keep three things in mind: 1)the prices of the firm charges can be quoted in the firm's currency or in the currencies of its foreign customers; 2) the firm and its customers can use the exchange rate as it stands on the date of each transaction, or they can agree to use a specific exhange rate, |
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| the potential harm that can arise from changes in the price of one currency relative to another. |
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| can be readily exchanged for other currencies. |
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| most readily convertible currencies. These are strong, stable currencies that are universally accepted and most often for international transactions, such as the US DOLLAR, JAPANESE YEN, CANADIAN DOLLAR, BRITISH POUND AND EUROPEAN EURO. |
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| when it is not acceptable for international transactions. Some govts may not allow their currency to be converted into a foreign currency in order to preserve their supply of hard currencies, such as the US dollar or the euro or to avoid capital flight. |
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| the rapid sell off by residents or foreigners of their holdings in a nation's currency or other assets, usually in response to a domestic crisis that causes them to lose confidence in the country's economy. The investors exchange their holdings in the weakening currency for those of another, often a hard currency. |
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| increases the nation's money supply. It is the monetary authority in each country that regulates the money supply, issues currency and manages the exchange rate of the nation's currency relative to other currency. Economic growht is associated with an increase in the supply and demand of the nation's money supply and by extension the nation's currency. |
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| the increase in value of the goods and services produced by an economy. To ensure accuracy we usually measure economic growth as the annual increase in realGDP in which the inflation rate is subtracted from the growth rate. |
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| when demand for money grows more rapidly than supply 2) central bank increases the nation's money supply faster than output. |
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| the tendency of investors to mimic each others' actions. |
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| occurs when investors buy stocks whose prices have been rising and sell stocks whose prices have been falling. |
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| a condition in which a nation's exports exceed its imports for a specific period of time. |
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| results when a nation's imports exceed its exports for a specific periiod of time, causing a net outlflow of foreign exchange. |
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| is a govt action to reduce the official value of its currency relative to other currencies. It is usually accomplished by the buying and selling of currencies in the foreign exchange market. |
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| the annual accounting of all economic transactions of a nation with all other nations. The balance of payments is the nation's balance sheet of trade, investment and transfer payments with the rest of the world. It represents the difference between the toal amount of money coming into and going out of a country. |
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| International monetary fund |
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| an international agency that aims to stabilize currencies by monitoring the foreign exchange systems of member countries and lending money to developing economies. |
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| egged exchange rate system |
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| "Bretton Woods agreement". The value of currencies is set relative to the value of another at a specificed rate. As this "reference value" rises and falls, so does the currency pegged to it. |
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| International monetary system |
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| consists of institutional frameworks, rules, and procedures that govern how national currencies are exchanged for another. By providing a framework for the monetary and foreign exchange activities of firms and govts worldwide, the system facilitates international trade and investment. |
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| the collective financial institutions that faciliatate and regulate flows of investments and capital funds worldwide. Key players in the system include finance ministries, national stock exchanges, commercial banks, central banks and the bank for international settlements, the world bank and International monetary fund. |
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| managers of pensions and mutual funds as well as insurance companies. |
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| underwrite *(guarantee the sale of ) stocks and bond issues and advise on mergers, such as the merger of Goldman Sachs in the US AND nOMURA sECURITIES IN jAPAN. |
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| provide capital to firms in the form of shares rather than loans. They are essentially investment banks that specialize in intn. operations. |
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| manage the assets of the very rich. Union bank in Switzerland and ABN Amro pRIVATE BANKING IN lUXEMBOURG ARE EXAMPLES. |
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| ARE LOCATED IN JURISDICTION WITH LOW TAXATION AND REGULATION, SUCH AS sWITZERLAND OR bERMUDA. bANCO gERNERAL IN pANAMA AND bANK OF nOVA sCOTIA IN THE bRITISH Virgin Islands. |
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| deal mainly with corporations or large businesses. |
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| how central banks can manipulate currency rates, usually with the aim of maintaining stable or orderly exchange rates. Such intervention is achieved by buying or selling currencies in the foreign exchange market. Such intervention is achieved by buying or selling currencies in the foreign exchange market. Ex. if the central bank of the US wants to support the value of the US dollar, it might buy dollars in the foreign exchange market. |
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| a unit of account or reserve asset, a type of currency used by central banks to supplement their existing reserves in transactions with the IMF and to manage international exchange rates. |
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| when the value of a nation's currency depreciates sharply or when its central bank must expend substantial reserves to defend the value of its currency thereby pushing up interest reates. |
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| results when domestic and foreign investors lose confidence in a nation's banking system, leading to widespread withdrawals of funds from banks and other financial institutions. |
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| arises when a national govt borrows an excessive amount of money, either from banks or from the sale of govt bonds. Ex. China's total foreign debt now exceeds $200 billion. However thee debt is manageable because China has a huge reserve of foreign exchange. In contrast Argentina is 150% of the country's GDP. iN ORDER TO PAY BACK, IT MUST USE FINANCIAL RESOURCES THAT MIGHT HAVE INVESTED INNSTEAD IN IMPORTANT NATIONAL PRIORITIES. |
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