International Business Chapter 10 with Complete Solutions

International Business Chapter 10 with Complete Solutions Foreign Exchange Risk The adverse consequences of unpredictable changes in exchange rates that can affect business deals. For example, major inflation/deflation Exchange Rate The rate at which one currency is converted into another. Exchange rates are explained through the value of another currency Strongest World Currencies US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc Foreign Exchange Markets The market for converting the currency of one country into that of another country (the FOREX). There is a considerable amount of money to be made by individuals or companies exchanging currency; sometimes companies go into the FOREX with extra profits to make more money. These markets are not in one place; it is a global network of banks, brokers, and exchange dealers connected electronically through communication systems Forward Exchange Occurs when two parties agree to exchange currency and execute the deal at some specific date in the future Forward Rates Exchange rates governing future exchange transactions Currency Swaps The simultaneous purchase and sale of a given amount of foreign exchange for two different value dates Carry Trade Involves borrowing one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high Purchasing Power Parity (PPP) A theory that utilizes the average price of a basket of goods and shows its value in other countries in the terms of a single currency Consumer Based Product Indexes Big Mac, Pizza Hut, Starbucks Bandwagon Effect Plays a large role in investor psychology; when traders move like a herd, all in the same direction at the same time, in response to each other's perceived actions. E.g. George Soros and his shorting of different currencies for major profits but he also has a great deal of power to destroy the power of currencies Efficient Markets Markets with no impediments to the free flow of goods and services, such as trade barriers. Categorized by strong