Finance Ch. 17

Why do companies operate multinationally?

- to seek production efficiency
- to avoid political, trade, and regulatory hurdles
- to broaden markets
- to seek raw materials/new technology
- to protect processes and products
- to diversify
- to retain customers

International Monetary System

the framework within which exchange rates are determined and it ties global currency, money, capital, real estate, commodity, and real asset markets into a network of institutions.
- Intergovernmental agreements
- Driven by each country's unique political

Spot Exchange Rate

the quoted price for a unit of foreign currency to be delivered on the spot or within a very short period of time.

Forward Exchange Rate

the quoted price for a unit of foreign currency to be delivered at a specified date in the future. A forward exchange contract locks in the exchange rate, even if the prediction is incorrect.
- Hedging
- used more by companies than individuals

Fixed Exchange Rate

for a currency is set by the government and is allowed to fluctuate only slightly around the desired rate (par value).

Floating/Flexible Exchange Rate

not regulated by the government, so supply and demand in the market determines the currency's value.
- Determined in part by imports and exports

Devaluation or Revaluation

of a currency is the technical term referring to the decrease or increase in the stated par value of a currency whose value is fixed.

Depreciation or Appreciation

of a currency refers to a decrease or increase in the foreign exchange value of a floating currency caused by market forces, not governments.

Freely Floating

a type of exchange rate in which exchange rate is determined by the supply and demand for the currency. Under this regime, governments may occasionally intervene in the market to buy or sell their currency to stabilize fluctuations, but they do not alter

Managed Floating

significant government intervention manages the exchange rate by manipulating the currency's supply and demand. Governments rarely reveal their target exchange rate levels when they use this type of regime because doing so would make it too easy for curre

Currency Board Arrangement

a country technically has its own currency but commits to exchange it for a specified foreign money unit at a fixed exchange rate. This requires the country to impose domestic currency restrictions unless it has enough foreign currency reserves to cover a

Fixed Peg Arrangement

the country locks its currency to another currency or basket at a fixed exchange rate. This allows the currency to vary only slightly from its desired rate, and if it moves outside the specified limits, its central bank intervenes to force the currency ba

Direct Quotation

To a person who considers the US to be home, American terms represent this.
The price of foreign currency expressed in USD. 1.52 USD buys 1 pound.

Indirect Quotation

The foreign currency price of one unit of the home currency is called this.
The number of units of other currency you can get for your USD. One pound buys 1.52 USD.

Discount

if we can obtain more of the foreign currency for a dollar in the forward market than in the spot market, the forward currency is less valuable than the spot currency, and the forward currency is said to be selling at this.

Premium

If we can obtain less of the foreign currency for a dollar in the forward market than in the spot market, the forward currency is more valuable than the spot currency, and the forward currency is said to be selling at this.

Interest Rate Parity

holds that investors should earn the same return on interest-bearing investments in all countries after adjusting for risk.

Forward Premium

whenever domestic interest rates are higher than foreign interest rates

Purchasing Power Parity

sometimes referred to as the law of one price, implies that the level of exchange rates adjusts so as to cause identical goods to cost the same amount in different countries.
- If a pair of tennis shoes costs $100 in the US and 50 pounds in the UK, this i

Inflation Rates and the US Dollar

The currencies of countries with higher inflation rates than the US inflation rate depreciate over time against the dollar. The currencies of countries with lower inflation rates than the US inflation rate appreciate over time against the dollar.

Foreign Bonds

issued in the country in whose currency the bond is denominated, and they are underwritten by investment banks in that country.

American Depository Receipts

US investors can also invest in foreign companies through these, which are certificates representing ownership of foreign stock held in trust.

Country Risk

political, economic, and social environment of a country.
- Examples include the risk that property will be expropriated without adequate compensation, tax rates, regulation, and currency repatriation.

Exchange Rate Risk

securities are often denominated in a currency other than the dollar, which means that returns on the investment depend on what happens to exchange rates.

Political Risk

refers to potential actions by a host government that would reduce the value of a company's investment. It can include high taxes, tighter currency controls, or restrictions on prices charge.

Business Climate

A country's social, political, and economic environment.