ADM 3318 Chapter 9: International Business - chapter 9

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10 Dec 2016

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Foreign exchange market: a market for converting the currency of one country into that of another country: exchange rate: the rate at which one currency is converted into another. The functions of the foreign exchange market: Foreign exchange risk: the risk that changes in exchange rates will hurt the profitability of a business deal. Insuring against foreign exchange risk: hedging: the process of insuring one"s business against foreign exchange risk by using forward exchanges or currency swaps. Spot exchange rates: the rate at which a foreign exchange dealer converts currency on any particular day. The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies. Forward exchange: when two parties agree to exchange currency and execute a deal at some specific date in the future.

Related Questions

Foreign exchange markets make it possible for trade to be enacted between countries without lengthy negotiations on trade terms. The exchange rate mechanism is a relatively stable process whereby different currencies can be exchanged in an orderly manner in conformity to the rules of currency exchange rates. Factors, such as the relative inflation and unemployment rates between the trading partners, affect the value of each country's currency in relation to the other countries' currency. The country with higher inflation and unemployment will have the lower valued currency.

(A.) Why is the foreign currency exchange market important to a business?

(B.) What is the benefit of the foreign currency exchange market to the U.S. company?

(C.) If the U.S. currency is decreasing versus other currencies of countries it trades with, how will that affect the U.S. company? If the reverse is true, how will that affect the US company?

orchiddonkey965

Market participants who use foreign exchange derivatives tend to take positions based on their expectations of future exchange rates. Portfolio managers of financial institutions may take positions in foreign exchange derivatives to hedge their exposure if they anticipate a decline in the value of the currency denominating their stocks. Speculators may take positions in foreign exchange derivatives to benefit from the expectation that specific currencies will strengthen. There are various techniques for forecasting, but no specific technique stands out because most have had limited success in forecasting future exchange rates.

As the value of a currency adjusts to changes in demand and supply conditions, it moves toward equilibrium. In equilibrium, there is no excess or deficiency of that currency. Thus, the initial task is to develop a forecast of specific exchange rates.

Discuss the following:

Discuss the four exchange rates forecasting methods and which you believe is the best to use and why.

Of the factors that affect exchange rates, in your opinion which one has the biggest impact? Why?

olivesardine69

Under a system of floating exchange rates, which of the following would not tend to cause an increase in the value of a country's currency?

Question 1 options:

An increased demand for the country's goods.

Offering higher interest rates than other countries.

A downturn in the country's business activity.

A lower rate of inflation than other countries.

Foreign currency is usually referred to as

Question 2 options:

"foreign commodities."

"foreign exchange."

"foreign investment."

"foreign value."

All else held constant, the near-term result of a decrease in the exchange value of country A's currency against country B's currency would most likely

Question 3 options:

increase A's exports to B.

decrease B's trade deficit with A.

increase B's exports to A.

decrease B's imports from A.

When international trade occurs, currency exchange

Question 4 options:

is usually optional and rarely necessary.

can be avoided through careful planning.

is both necessary and unavoidable.

cannot occur unless both parties are coerced.

Question 5 (1 point)

In order to purchase a vacation home in Great Britain, an American buyer would

Question 5 options:

demand British pounds and supply U.S. dollars in the foreign exchange market.

demand U.S. dollars and supply British pounds in the foreign exchange market.

demand and supply British pounds, but not U.S. dollars, in the foreign exchange market.

demand and supply U.S. dollars, but not British pounds, in the foreign exchange market.

Which of the following will lead an American to exchange U.S. dollars for British pounds?

Question 6 options:

Importing a case of British salmon

Purchasing a cottage in the British countryside

Investing in a British manufacturing company

All of the above

Which of the following was established as a result of the Bretton Woods Conference?
I. The International Monetary Fund (IMF)
II. The World Bank
III. The Geneva Conventions

Question 7 options:

I and II only

I and III only

II and III only

I, II, and III

A "weak" (i.e., decreased value) U.S. dollar in relation to other currencies will typically have which of the following effects?

Question 8 options:

U.S. exports to other countries will decline.

Foreign countries will sell more goods in U.S. markets.

The U.S. trade deficit will increase.

None of the above.

Special Drawing Rights (SDRs)

Question 9 options:

constitute an international currency created by the International Monetary Fund.

are considered as "paper gold", used as a substitute for gold in international exchange.

are used as part of the official reserves of central banks to settle international debt.

all of the above.

10.

Which of the following will lead to an inflow of U.S. dollars in the U.S. Balance of Payments account?

Question 10 options:

Exports of U.S. goods and services

Gifts (aid) received by the U.S. from foreign countries

Foreign investment in U.S. Treasury securities

All of the above

11.

If the U.S. sells $150 million of wheat to Brazil in return for $200 million of Brazilian oil, the $50 million difference will necessarily

Question 11 options:

be balanced by other transactions in the U.S. Balance of Payments account.

never by paid back, resulting in a $50 million loss for Brazil.

result in the sale of $50 million more wheat to Brazil later on.

obligate the U.S. to provide $50 million in foreign aid to Brazil.

12.

An inflow of U.S. dollars to the U.S. Balance of Payments account will occur when

Question 12 options:

	the U.S. buys foreign currency in international markets.
	the U.S. donates foreign aid to other countries.
	Americans make investments in foreign assets.
	the U.S. exports merchandise to foreign countries.

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13.

A demand for foreign goods

Question 13 options:

	is a demand for foreign currency.
	requires supplying domestic currency.
	both of the above.
	none of the above.

ADM 3318 Chapter 9: International Business - chapter 9

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