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Loyola University Maryland - IB282 Ch. 9-13 - Daniels 13 ed.
IB282 Spring 2011 Loyola U. Maryland
108
Business
Undergraduate 3
04/03/2011

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Term
Baltic Dry Freight Index
Definition
Issued daily by the London-based Baltic Exchange, this index provides an assessment of the price of moving major raw materials-such as oil, coal, iron ore, and grain- by sea, as determined by shipping rates charged on 26 major sea routes.
Term
American Terms/Direct Quote
Definition
the number of dollars per unit of foreign currency.
Term
Arbitrage
Definition
the purchase of foreign currency on one market for immediate resale on another market (in a different country) to profit from a price discrepancy
Term
(BIS) Bank for International Settlements
Definition
a central banking system in Switzerland which is owned and controlled by 55 member banks. This bank conglomerate divides the foreign-exchange market into reporting dealers (i.e. dealer banks or money center banks), other financial institutions, and nonfinancial institutions.
Term
Base Currency
Definition
the currency the foreign exchange rate is based on. For example, In European Terms the dollar is the ____ _________ (it’s the “[terms currency] per [1] dollar”)
Term
Bid
Definition
The rate at which traders buy foreign exchange.
Term
Chicago Mercantile Exchange (CME) Group
Definition
Started on July 9, 2007, this is one of the best known commodity exchanges. Teamed up with Reuters to launch the world's first centrally cleared global foreign exchange platform called FXMarketplace. It operates according to open outcry: traders stand in a pit and call out prices and quantities.
Term
A Confirmed Letter of Credit
Definition
when a third bank agrees to make the payment for an importer is the importer fails to pay a time draft.
Term
Cross Rate
Definition
The dollar is part of four of the top seven currency pairs traded. The dollar and the euro is number one and the dollar and the yen is number two. A currency pair traded not involving the dollar is called a...what?
Term
Currency Swaps
Definition
An Over-The-Counter exchange that deals more with interest-bearing financial instruments (such as a bond), and involves the exchange of principal and interest payments.
Term
Derivatives
Definition
are [foreign exchange] financial instruments whose value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date. Ex. outright forward transactions and foreign-exchange swaps.
Term
draft/Commercial Bill of Exchange
Definition
an instrument in which one party (the drawer) direct another party (the drawee) to make a payment. (Ex. A check)
Term
European Terms/Indirect Quote
Definition
the number of units of a foreign currency per dollar.
Term
Exchange Rate
Definition
The price of a currency in terms of another currency.
Term
foreign exchange
Definition
money denominated in the currency of another nation or group of nations.
Term
Commodity
Definition
A product that is difficult to differentiate from those of competitors, such as raw materials and agricultural output. Commodities are the only option for global strategy because they serve a universal need (gasoline, steel, sugar, or wheat).
Term
Foreign-Exchange Market
Definition
The market in which money denominated in the currency of another nation of group of nation's is traded.
Term
Configuration
Definition
dispersing value activities where/how many places in the world. Ranges from concentrated (the company performs all value-chain activities in 1 location) to dispersed (company performs various value activities in dif countries).
Term
Coordination
Definition
The way that managers connect the activities of the value chain. 1. As companies globally configure value activities, they must develop coordination tools. Coordinated well, MNEs can leverage their core competencies, using them to serve customers, boost sales, and improve profits. Coordinated poorly, MNEs fail to leverage their core competencies from country to country.
Term
forward discount
Definition
This exists when the forward rate is less than the spot rate.
Term
Core Competency
Definition
is a special outlook, skill, capability, or tech that runs through the firms operations. It is 1) the unique skills and/or knowledge that it does better than its competitors, and 2) essential to its competitiveness and profitability. A core competency can emerge from various sources including: product development, employee productivity, manufacturing expertise, marketing imagination, and executive leadership.
Term
forward premium
Definition
this exists when the forward rate is greater than the spot rate.
Term
Futures Contract
Definition
specifies the exchange rate to be given at a particular price on a particular future date as specified in the _______ _____________ to all parties involved.
Term
Digitization
Definition
Involves converting an analog product into a string of zeros and ones. Workers can move goods and services anywhere in the world at negligible cost and complication.
Term
Economies Of Scales
Definition
Refers to the decrease in the unit cost of production associated with the increase in total output. Reduction in the unit cost of a product results from the increasing efficiency that comes with larger operations.
Term
FX Swap
Definition
a combination of both a spot exchange and a outright forward transaction (one party exchanges the currency immediately (spot exchange) and the other party promises to exchange the currency at a current fixed rate at a later date (outright forward transaction)).
Term
hedge fund
Definition
typically used by wealthy institutions and individuals that are allowed to used aggressive strategies unavailable to mutual funds.
Term
Interbank Transactions
Definition
Transactions between banks.
Term
Interest Arbitrage
Definition
This is the investing in debt instruments, such as bonds, in different countries in an effort to earn a profit due to interest rate differentials.
Term
Letter of Credit (L/C)
Definition
This is investing in debt instruments, such as bonds, in different countries in an effort to earn a profit due to interest rate differentials.
Term
Offer
Definition
The rate/price at which trader's sell foreign exchange.
Term
Five-forces model
Definition
A framework used to assess industry structure and business strategy in estimating the potential for profitability. Chart page 398
Term
Option
Definition
This is a foreign-exchange instrument that gives the owner the right but not the obligation to trade a foreign currency at a specific exchange rate.
Term
Global Integration
Definition
the process of combining differentiated parts into a standardized whole. The higher the pressure for ______ _____, the greater the end to maximize efficiency, and, conversely, the higher the pressure for local responsiveness, the greater the need to adapt to local conditions.
Term
Global Strategy
Definition
1. Global strategy emphasizes improving worldwide performance through the sales and marketing of common goods and services with minimum product variation. Directs mangers’ attention to two absolute production and marketing standards. A global strategy champions worldwide consistency and standardization. Exploits available location economies and achieves the efficiency potentials of lean operations.
Term
Outright Forward Transactions
Definition
A foreign-exchange instrument that grants a promise to exchange the currency at a fixed rate at a later date
Term
Industry Organization (IO) Paradigm
Definition
pressures that markets demonstrate perfect competition- many firms with small market shares, all firms are price takers, identical products are sold by all firms, companies can freely enter and exit the industry, and there is perfect knowledge.
Term
Sight Draft
Definition
This requires the importer to make the payment immediately as the exporter’s goods/services are provided.
Term
Speculation
Definition
the buying and selling of a commodity (for example foreign exchange) that has both an element of risk and the chance for great profit.
Term
Industry Structure
Definition
1. The idea of industry structure helps explain the functions, form, and interrelationships among: suppliers of inputs, buyers of outputs, substitute products, potential new entrants, rivalry among competing sellers→ five forces model.
Term
Integration-responsiveness (IR) grid
Definition
helps managers map the interaction of global integration and local responsiveness. Expresses how a company’s strategy is a function of the relationship between its value chain and the prevailing pressures for global integration or local responsiveness in its industry. IR grid identifies the generic classes of industry settings in terms of the relative trade-off of integration and responsiveness pressures. Pg 421 11.6.
Term
International Strategy
Definition
1. International strategy leverages a company’s core competencies in foreign markets. It allows limited local customization. Relies on local subsidiaries in each country to administer value chains set by headquarters. Ex: McDonald’s, Kellogg, Google, Wal-Mart, Microsoft. 3. Benefits- International strategy creates value by transferring core competencies and unique products to foreign markets where rivals are unable to compete. Works well when: 1) a firm has a core competence that foreign competitors lack and 2) industry conditions do not demand high degrees of global integration or local responsiveness.
4. Limitations- headquarters’ ethnocentric orientation can misread foreign-market opportunities and threats. Leveraging the firm’s core competency, as best understood by home-office executives, downplays adapting value activities for local conditions. Doesn’t work if competitors figure out how to act accordingly.
Term
Spot Rate
Definition
The rate at which a transaction is settled in a spot transaction.
Term
Spot Transaction
Definition
An exchange of currencies within two days of the current rate.
Term
Spread
Definition
The difference between the bid and offer rates.
Term
Terms Currency
Definition
the numerator in the foreign exchange equation. It says how much of this currency can be bought by the base currency.
Term
Time Draft
Definition
When the payment is to be made by the importer to the exporter at a later date.
Term
Advance import Deposit
Definition
occurs when a government requires a deposit of money prior to the release of foreign exchange to pay for imports; It can require the ______ _______ as long as a year in advance.
Term
Black Market
Definition
This closely approximates a price based on supply and demand for a currency instead of a government-controlled price and they exist when people are willing to pay more for dollars than the official rate.
Term
The Bretton Woods Agreement
Definition
established a par value (i.e. benchmark value) for each currency initially quoted in terms of gold and the U.S. dollar. At first exchange-rates could only fluctuate away from a certain percent of their par value, but now par values have been done away with to encourage greater exchange-rate flexibility. Created right after WWII.
Term
European Central Bank (ECB)
Definition
This sets the monetary policy for the adopters of the Euro. The central bank of those members of the European Union who share a common currency
Term
European Monetary System (EMS)
Definition
This was set up in 1979 as a means of creating exchange-rate stability within the European community (EC). Once the exchange rates of countries in the EC started fluctuating similarly the stage was set for the EMU to form.
Term
European Monetary Union (EMU)
Definition
The economic and monetary union of the European Union is the currency union (built on a single market) of the European Union members who have adopted the euro as their sole legal tender. The requirements to be in this group are one's annual government deficit must not exceed 3 percent of GDP, Total outstanding government debt must not exceed 60 percent of GDP, Rate of inflation must remain within 1.5 percent of the three best-performing EU countries, the average nominal long-term interest rate must be within 2 percent of the average rate in the three countries with the lowest inflation rates, and exchange-rate stability must be maintained, meaning that for at least two years the country concerned has kept within the "normal" fluctuation margins of the European Exchange Rate Mechanism.
Term
[International] Fisher Effect (IFE)
Definition
a theory that states the interest-rate differential is an unbiased predictor of future changes in the spot exchange rate. This implies that the currency of the country with the lower interest rate will strengthen in the future compared to other currencies. This makes sense because interest rates are based on inflation rates.
Term
Fundamental Forecasting
Definition
This method of forecasting uses economic variables to predict future exchange rates.
Term
Hard Currency
Definition
a currency that is usually fully convertible and strong or relatively stable in value in comparison with other currencies.
Term
Fisher Effect
Definition
The theory that the nominal interest rate in a country is determined by the real interest rate and the inflation rate.
Term
International Monetary Fund (IMF)
Definition
a group organized after WWII to promote exchange-rate stability and facilitate the international flow of currencies. The fundamental mission of the IMF is to ensure stability in the international monetary system, promote international monetary cooperation and exchange-rate stability, facilitate the balanced growth of international trade, and to provide resources to help members in balance-of-payments difficulties or to assist with poverty reduction.
Term
Jamaica Agreement of 1976
Definition
This eliminated the concept of par values in order to permit greater exchange-rate flexibility.
Term
Multiple-Exchange Rate System
Definition
A systems in which a government sets different exchange rates for different types of transactions.
Term
Par Value
Definition
The central value of a pegged exchange rate, around which the actual rate is permitted to fluctuate within set bounds.
Term
The Purchasing Power Parity Theory
Definition
A theory that suggests the change in relative inflation rates causes a change in the exchange rates of two countries which keeps the actual price of the goods very similar to what they have been.
Term
Quota
Definition
A certain amount of money contributed to the IMF that acts as a pool on money for the IMF to draw from to lend money to other countries and is the basis for how much a country can borrow from the IMF. The size of the ______ also determines the voting rights of every country involved.
Term
The Smithsonian Agreement
Definition
The Smithsonian Agreement in December 1981 was the beginning of allowing exchange-rates to determine their value based on the market. It came after the U.S. announced (August 1981) it would not trade it’s dollars for gold (in order to keep it’s gold reserves substantial because the dollar was weakening at the time.)
Term
Soft (or weak) currency
Definition
A currency that is usually not fully convertible, is unstable in value, not very liquid, and not widely accepted as payment for goods and services.
Term
Special Drawing Rights (SDR)
Definition
This allows the IMF to give member countries instant reserve assets (in addition to relying on gold or U.S. dollars) in order to expand global liquidity. This is also the unit of account in which the IMF keeps its records (so they don’t base the assets of other countries in a certain currency or in gold, they manage it in ____ ____ ____ .
Term
Technical Forecasting
Definition
This is a method of forecasting that uses past exchange rates to predict future exchange rates, however research has shown that using past exchange rates is not the best predictor for predicting future exchange rates.
Term
Local Responsiveness
Definition
Designing and making a product that local customer prefer, tailoring channel structures to buyer preferences, and adapting marketing practices to consumption patterns. This spurs companies to sacrifice degrees of global standardization.
Term
Location Economies
Definition
Economies that arise from performing a value activity in the most productive location given prevailing economic, political, legal, and cultural conditions.
Term
Multidomestic Strategy
Definition
1. Multidomestic strategy adjusts products, services, and business practices to meet the needs of local markets. Holds unique physical and metaphysical features that prevent the home office from effectively supervising foreign operations. MD strategy holds that value-chain design is the prerogative of the local subsidiary, not the unilateral declaration by the home office. If host governments offer incentives for local manufacturing, the subsidiary can build its own plant. 4. Benefits- Management that chooses the Multidomestic strategy believes in customizing value activities to the unique condition that prevail in different markets. Makes sense when the company faces high need for local responsiveness and low need to reduce costs via global integration. Minimizing political risk given the local standing of the company, lower exchange-rate risk given reduced need to repatriate funds, greater prestige given its national prominence. 5. Limitations- Customizing products and processes to local markets increases costs. Different product designs require different materials; production runs become shorter, and new channels. It’s impractical in cost-sensitive situations. Decentralizes control to local managers→ local adaptation can create different management styles and value-chain designs.
Term
Perfect Competition
Definition
many firms with small market shares, all firms are price takers, identical products are sold by all firms, companies can freely enter and exit the industry, and there is perfect knowledge.
Term
Strategy
Definition
Management's idea on how to best attract customers, operate efficiently, compete effectively, and create value. Guides managers in building and sustaining the company's competitive position within its industry.
Term
Transnational Strategy
Definition
simultaneously engages pressures for global integration and local responsiveness in ways that leverage insight to improve the firm’s core competency. A compromise between global integration and local responsiveness within a strategic mindset of capitalizing on the specialized knowledge the firm commands. Makes MNE differentiate its capabilities from country to country. A transnational strategy makes the exchange of ideas across value activities a key element of competitive advantage. 6. Benefits- fine-tuned balancing of global integration and local responsiveness. Learning in the transnational strategy pushes manager to respond to changing environments, configuring resources and coordinating processes without imposing more bureaucracy. Firms facing pressure for global integration and for local responsiveness yet seeing opportunities to leverage the knowledge that permeates the value chain use transnational strategy. Limitations- Transnational strategy is even more difficult to implement in practice. Limitations arise from complicated agendas, high costs, and cognitive limits.
Term
Value
Definition
A measure of a firm's capability to sell what it makes for more than the costs incurred to make it.
Term
Value Chain
Definition
The set of linked value-creating activities the company performs to design, produce, market, distribute, and support a product. Value-chain analysis helps managers understand the behavior of costs and existing and potential sources of differentiation.
A value chain disaggregates a firm into:
• Primary activities that create and deliver the product
• Support activities that aid the individuals and groups engaged in primary activities.
Term
Agglomeration
Definition
competitors may have performed the costly task of evaluating location and building market acceptance for a particular type of products so follower may get a free ride. Clusters of competitors in locations that attract multiple suppliers and personnel with specialized skills.
Term
Concentration Strategy
Definition
A strategy by which an international company builds up operations quickly in one or a few countries before going to another.
Term
Diversification Strategy
Definition
A strategy whereby a company moves rapidly into many markets and gradually increases its commitments within each one.
Term
Escalation of Commitment
Definition
the more time and money companies invest in examining an alternative, the more likely they are to accept it, regardless of its merits.
Term
First-mover advantage
Definition
by being the first major competitor in a market, the company can easily gain the best partners, best locations, and best suppliers.
Term
go-no-go decision
Definition
a decision that is based on a proposal’s meeting a specific threshold rather than comparing it with other alternatives.
Term
harvesting (or divesting)
Definition
Harvesting (divesting) companies commonly reduce commitments in some countries because those countries have poorer performance prospects than do others. Companies must decide how to get out of operations if they no longer fir the overall strategy or there are better alternative opportunities.
Term
Imitation Lag
Definition
One strategy for exploiting temporary innovative advantages is known as the imitation lag whereby a company moves first to those countries where local competitors are most likely to catch up to the innovative advantage.
Term
Liability of foreignness
Definition
Foreign companies have a lower survival rate than local companies for many years after they being operations.
Term
Liquidity Preference
Definition
states that investors usually want some of their holdings to be in highly liquid assets on which they are willing to take a lower return. Need liquidity to make near-term payments, dividends.
Term
Oligopolistic Reaction
Definition
managers may purposely crowd a market to prevent competitors from gaining advantages therein that they can use to improve their competitive positions elsewhere. Companies may gain advantages by locating where competitors are.
Term
Spillover Effect
Definition
situation in which the marketing program in one country results in awareness of the product in other countries. Additional customers may be reached with little additional costs.
Term
Born Global
Definition
These companies step straight onto the world stage, exporting form day on of operations.
Term
Countertrade
Definition
refers to any one of several different arrangements that parties use to trade products with limited or no use of currency. Counter trade has unique costs and benefits: inefficient and flexibility
Term
Customs Agencies
Definition
Help international trades. Two main factors: Procedural assistance and efficiency improvements. Procedural assistance is the process of customs – the regulations of importing and exporting to foreign markets. Efficiency improvement is the continual testing of technologies and management systems to make sure there aren't delays, too many documents, or high administrative fees at customs.
Term
Direct Exports
Definition
products sold to an independent intermediary outside of the exporters home country which then sells the product in the export market to the final consumer.
Term
Direct Selling
Definition
Involves sales with the customers, over the internet, and to foreign retailers and end users.
Term
Export Intensity
Definition
share of the firms total output that is exported
Term
Export Intermediaries
Definition
Range in size from small, specialized one person operations to international trading companies with a globally dispersed staff. Major types of indirect intermediaries are the export management company (EMC), the export trading company (ETC) and export agents, merchants, or remarketers.
Term
Export Management Company (EMC)
Definition
Major type of indirect intermediary. The EMC's task is generating orders for its clients' products through the selection of appropriate markets, distribution channels, and promotional campaigns. EMCs operate on a contractual basis-usually as an agent of the exporter. Most EMCs are entrepreneurial companies that specialize by product, function, or market area. EMCs are not a universal solution. Often they have few resources, devote too little attention, and assume too much control.
Term
Export Trading Companies (ETC)
Definition
are similar to EMCs, but they tend to operate based on demand rather than supply. They identify suppliers who can fill orders in overseas markets. Made after the Export Trading Company Act which removed some of the antitrust obstacles to the creation of ETCs. ETCs in the US are exempt from antitrust provisions in order to allow them to collaborate with other companies to serve foreign markets.
Term
Exporting
Definition
The sale of goods or services produced by a company based in one country to consumers that reside in a different country. Most companies concentrate on domestic rather than foreign markets. Companies run into problems adjusting for foreign cultures because they are so familiar with their home markets. Need to: Adjust financial management, Adjust customer management, Adjust for information technology, Create a catalog of additional stumbling blocks
Term
Freight Forwarder
Definition
an agent for the exporter who takes responsibility for moving cargo to an overseas destination
Term
Import Broker (customs broker)
Definition
provides access to several suppliers or produces as well as helps companies during price negotiation, arranging transportation and insurance, overseeing logistics, and dealing with damaged and rejected goods. Key broker functions: Valuing products in such a way that they qualify for more favorable duty treatment, Qualifying for duty refunds through drawback provisions, Deferring duties by using bonded warehouses and foreign trade zones, Document and paper flow management, Limiting liability by properly making an imports country of origin
Term
Import Strategy
Definition
identifies three types of importers
Identifies three types of importers: importers that look opportunistically for any product around the world that they can deliver to local citizens for profit. These companies see a gap in a local marketplace, importers that look to foreign sourcing to get the highest quality products at the lowest possible price, and importers that use foreign sourcing to optimize their supply chains.
Term
Importing
Definition
purchase of products by a company based in one country from sellers that reside in another.
Term
Incremental Internationalization
Definition
holds that as a company gains experience, resources, and confidence, it progressively exports to increasingly distant and dissimilar countries.
Term
Indirect Exports
Definition
are sold to an independent intermediary in the domestic market, which then sells the product in the export market to the final consumer.
Term
Indirect Selling
Definition
sells goods to or through an independent domestic intermediary in its home country.
Term
Intermodal Transportation
Definition
movement of goods across different modes, from origin to destination.
Term
Serendipity
Definition
catalyst for companies to begin exporting
Term
Small and medium-sized enterprise (SME)
Definition
companies that employ fewer than 500 employees and that typically do not have managers to seek assistance.
Term
Third-party logistics
Definition
Agents that develop technology to help companies move products across borders. They focus on understanding trade practices, identifying opportunities, manage risks, and shepherd exports and imports from buyers to sellers.
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