AGB 302, Ch 10 Exam Questions with Complete Answers (A+ Graded)

What happens in the _______________ can have a fundamental impact on the sales, profits, and strategy of an enterprise - Answer-foreign exchange market foreign exchange market - Answer-a market for converting the currency of one country into that of another country; the lubricant that enables companies based in countries that use different currencies to trade with each other; global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems exchange rate - Answer-the rate at which one currency is converted into another Two Functions of the foreign exchange market - Answer-1. to convert the currency of one country into the currency of another 2. to provide some insurance against the risks that arise from volatile changes in exchange rates, commonly referred to as foreign exchange risk 4 Main uses of Exchange Market for International Business - Answer-1. income from licensing, exports, or foreign investments have to be converted to the home country currency 2. to pay a foreign company for its products or services in its country's currency 3. to invest spare cash for short terms in money mar-kets 4. Currency speculation Currency Speculation - Answer-involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates Carry trade - Answer-a kind of speculation; involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high hedging - Answer-When a firm insures itself against foreign exchange risk The spot exchange rate is - Answer-the rate at which a foreign exchange dealer converts one currency into another currency on a particular day; Ex: a tourist converting dollars to pounds Spot exchange rates are reported . . . - Answer-on a real-time basis on many financial websites An exchange rate can be quoted in two ways: - Answer-1. as the amount of foreign currency one U.S. dollar will buy 2. as the value of a dollar for one unit of foreign currency