Term
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Definition
| the movement towards a more integrated and interdependent world economy |
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Term
| What drives globalization? |
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Definition
| The digital revolution that facilitates intl. commerce (and global capital flow) by providing capabilities that did not exist a few years ago. Also, it is driven by political factors and intertwined with social changes. |
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Term
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Definition
| reducing trade barriers, reducing costs of coordination, increasing economies of scale, and encouraging standardization and global branding. |
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Term
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Definition
| any measure taken by a government to protect domestic producers, even though trade benefits everyone as a whole. |
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Term
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Definition
| old belief that exports were to be promoted and imports discouraged in all cases because exports led people in other countries to owe domestic producers money |
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Term
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Definition
| tax imposed on imported goods; can be designed to discourage importing, raise revenue, or both. Tariffs used to be the primary source of govt. revenue before the income tax. |
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Term
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Definition
| set fixed limits on different products |
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Term
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Definition
| sum of all transactions between domestic and foreign individuals, firms, and governments |
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Term
| How do import quotas affect a country's balance of payments? |
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Definition
| In the short-run, quotas help the balance of payments decreasing foreign outflow payments, but the prices of domestic products will increase. |
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Term
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Definition
| ban on some kinds of imports. It is an extreme form of the import quota. |
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Term
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Definition
require that at least a portion of any imported product be constructed from parts manufactured in the importing nation.
This rule is sometimes used by capital-intensive importers that use labor-intensive countries to make the finished product. |
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Term
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Definition
| mechanism automatically imposes a tariff barrier against unfairly cheap imports by levying a duty (tariff) on all imports below a particular trigger price |
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Term
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Definition
| prevent foreign producers from dumping excess goods on the domestic market at less than cost to squeeze out competitors and gain control of the market |
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Term
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Definition
| limit foreign currency transactions and set exchange rates |
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Term
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Definition
| imposed on imported goods that are produced in a foreign country with the aid of a governmental subsidy |
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Term
| Export Administration Act of 1979 |
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Definition
| certain exports require licenses |
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Term
| Export Trading Company Act of 1982 |
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Definition
| permits competitors to form export trading companies without regard to U.S. antitrust legislation |
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Term
| negative economic effects of tariffs and quotas (WRIT) |
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Definition
workers shifted from efficient export industries to less efficient protected industries.
real wages and total output decline
Import quotas are not equal for all importers.
Tariffs go to government officers. |
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Term
| arguments for protectionism |
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Definition
protects domestic jobs
certain industries are essential to national security
infant industries need protection in the early stages of development. |
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Term
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Definition
price of one country's currency in terms of another country's currency
If foreign currency becomes weaker compared to U.S. dollar, it will have an advantage in the U.S. market. |
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Term
| What causes a rise in demand for a currency? |
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Definition
| When demand for a country's merchandise, capital assets, and financial instruments rises, demand for its currency rises. |
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Term
| fixed exchange rate system |
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Definition
exchange rate is either fixed or allowed to fluctuate only within a very narrow range
Advantage: predictability
Disadvantage: government can manipulate currency value. |
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Term
| freely floating exchange rate system |
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Definition
government steps aside and allows exchange rates to be determined entirely by the market forces of supply and demand
Advantage: automatically corrects disequilibrium in the balance of payments
Disadvantage: makes a country vulnerable to economic conditions in other countries |
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Term
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Definition
most common system in which govt. allows market forces to determine exchange rates until they move too far in one direction or another.
Advantages: freely floating exchange rate system while allowing for government intervention. |
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Term
| demand curve for foreign currency |
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Definition
| down-slope b/c, when currency is cheaper, goods and services denominated in that currency become more affordable and domestic consumers need more of that currency |
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Term
| supply curve for foreign currency |
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Definition
| upward-sloping because, as currency becomes more expensive, domestic goods and services are more affordable so they inject more domestic currency into the domestic market. |
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Term
| appreciated/depreciated (currency and inflation) |
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Definition
one currency can be exchanged for more units than the second currency (gains purchasing power). Second currency depreciated against the first.
Country B's currency (3% inflation) appreciates by 4% in relation to Country A's (7%). |
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Term
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Definition
| When Country A's rate of inflation rises relative to that of other countries, Country A's products become more expensive and demand for its currency falls. |
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Term
| How does inflation affect currency demand and supply? |
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Definition
| Inward shift of demand curve. As investors unload this currency, more of it is available, so supply curve has an outward shift. |
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Term
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Definition
| Citizens with higher incomes look for new consumption opportunities in other countries, driving up demand for those currencies and shifting the demand curve to the right. |
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Term
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Definition
| Country A's interest rate rises relative to Country B's, demand for Country A's currency rises. |
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Term
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Definition
(most important of five factors affecting currency, including inflation, interest, incomes, capital flow and government intervention)
If a country with high real interest rates loosens restrictions against the cross-border movement of capital, the demand for currency will rise as investors seek higher returns. |
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Term
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Definition
| number of units of a foreign currency that can be received today in exchange for a single unit of the domestic currency |
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Term
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Definition
| number of units of a foreign currency that can be received in exchange for a single unit of the domestic currency at some definite date in the future (30 days). |
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Term
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Definition
| One unit of domestic currency fetches more units foreign currency in the forward than in the spot market. |
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Term
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Definition
| One unit of domestic currency fetches fewer units foreign currency in the forward than in the spot market. |
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Term
| Do firms with payables denominated in foreign currency want the foreign currency to appreciate or depreciate? |
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Definition
If the foreign currency depreciates/
domestic currency appreciates by the settlement date, fewer units of the domestic currency will be needed to pay it off. |
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Term
| Do firms with receivables denominated in foreign currency want the foreign currency to appreciate or depreciate? |
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Definition
| If the foreign currency appreciates/ domestic currency depreciates by the settlement date, it can be turned into more units of the domestic currency. |
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Term
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Definition
| exposure to fluctuations in exchange rates between beginning date of transaction and the settlement date |
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Term
| What must a firm do to address transaction exposure (EMU)? |
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Definition
Estimate its net cash inflows in each currency for impacted transactions
If inflows and outflows are equal, transaction exposure is minimal.
Measure potential effect of exposure in each currency
Use hedging tools to mitigate exposure to exchange rate fluctuations |
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Term
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Definition
Forgo possible upside to protect your downside.
Purchase (or sell) the foreign currency forward to lock in a definite price to protect against foreign currency appreciation (depreciation). |
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Term
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Definition
Firm w/payable in foreign currency can buy a money market instrument in that currency that is timed to mature when the payable is due.
Firm w/receivable in foreign currency can borrow the amount and convert it to its domestic currency now, then pay off the foreign loan when the receivable is collected. |
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Term
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Definition
| Bank guarantees that it will make available to the firm a given quantity of a certain currency at a definite rate at some point in the future. Premium is price charged for this guarantee. |
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Term
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Definition
| are commodities traded on an exchange (no risk of nonperformance). |
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Term
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Definition
| gives the holder the right to buy a specified amount of currency at a specified price at a specified date in the future; hedge payables |
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Term
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Definition
| gives the holder the right to sell a specified amount of currency at a specified price at a specified date in the future; hedge receivables |
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Term
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Definition
| exposure to fluctuations in exchange rates resulting from overall economic conditions |
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Term
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Definition
| estimating economic exposure; prepare a pro forma income statement for operations in each country |
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Term
| sensitivity of cash flows |
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Definition
| estimating economic exposure; entity performs regression analysis, weighting each net cash flow by the prevalence of that currency in the firm's portfolio |
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Term
| How should foreign sales and purchases be handled when foreign currency inflows are greater? |
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Definition
| When foreign currency inflows are greater, reduce foreign sales and increase foreign orders. |
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Term
| How should foreign sales and purchases be handled when foreign currency outflows are greater? |
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Definition
| When foreign currency outflows are greater, increase foreign sales and decrease foreign orders. |
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Term
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Definition
| exposure to fluctuations in exchange rates between beginning date of transaction and the date that financial statements denominated in another currency must be reported |
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Term
| exposure to translation risk determined by (PLA) |
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Definition
proportion of total business conducted by foreign subsidiaries (over 1/2 = high risk)
location of foreign subsidiaries
applicable accounting method |
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