FME324 1st Exam: Globalization and Global Finance

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Questions and Answers

What is the main characteristic of globalization?

The exchange of capital, goods, and services across international borders

The interconnectedness of people and businesses across the world (correct)

The financial activities and markets that occur on a worldwide scale

The ability to move and communicate easily with others all over the world

What is the term for the difference in value between a country's imports and exports?

Exchange Rate

Quota

Tariff

Balance of Trade (correct)

What is the purpose of a tariff?

To restrict imports (correct)

To facilitate international business

To promote free trade

To encourage economic interdependence

What is the term for international trade without restrictions?

Free Trade Signup and view all the answers

What does a negative BKA (deficit) indicate?

More money flowing out of the country Signup and view all the answers

What is the risk faced by a new international trader?

Buyer Risks Signup and view all the answers

What is the purpose of corporate governance?

To direct and control a company Signup and view all the answers

What is the term for the state of being dependent upon one another in economic terms?

Economic Interdependence Signup and view all the answers

What is the condition required for purchasing power parity (PPP) to hold?

The exchange rate must change by the difference between the domestic and foreign rates of inflation Signup and view all the answers

What is the consequence of expected real interest rates differing between countries, according to the Fisher Effect?

Capital will flow to the country with the higher real rate Signup and view all the answers

What is the relationship between absolute form of PPP and international barriers?

Without international barriers, consumers shift their demand to wherever prices are lower Signup and view all the answers

What is the relationship between interest rate parity and the forward differential?

The interest rate differential should approximate the forward differential Signup and view all the answers

What is the main characteristic of a pegged exchange rate?

Being fixed or pegged to another currency or measure of value Signup and view all the answers

What is the purpose of the balance-of-payments accounting?

To record a country's transactions with the rest of the world Signup and view all the answers

What does a positive BCA (surplus) indicate about a country's trade?

The country exports more than it imports Signup and view all the answers

What is the purpose of the statistical discrepancy in balance-of-payments accounting?

To ensure that all debits equal credits Signup and view all the answers

What is the characteristic of a dirty float?

A country tries to hold the value of its currency within a certain range Signup and view all the answers

What does a positive BKA (surplus) signify about a country's foreign investment?

More foreign money is entering the country than leaving Signup and view all the answers

What is the term for the price agreed upon in a contract, which is equal to the forward exchange rate at the time of entry?

Delivery price Signup and view all the answers

What happens when a currency's value rises in terms of another currency?

It appreciates Signup and view all the answers

What is the financial strategy of buying a currency pair at a lower exchange rate in one market and selling it at a higher rate in another market?

Currency arbitrage Signup and view all the answers

What measures gains or losses that arise from settling existing financial obligations in a foreign currency?

Transaction exposure Signup and view all the answers

What is the term for the potential exposure created when a product has not yet been shipped or billed?

Backlog exposure Signup and view all the answers

What is the economic principle that states that a product sold in two different markets will have the same price if there are no restrictions on sale and transportation costs are equal?

Law of one price Signup and view all the answers

What is the main assumption of the Law of One Price?

That there are no restrictions on the sale of the product. Signup and view all the answers

What is the primary function of a foreign currency derivative?

To hedge foreign exchange risk. Signup and view all the answers

What is the condition for achieving equilibrium in the forward market?

When the forward differential equals the expected change in the spot rate. Signup and view all the answers

What is the main difference between a forward contract and a spot contract?

A forward contract is for a future date, while a spot contract is for immediate delivery. Signup and view all the answers

What is the major relaxation of the absolute version of PPP in the relative form of PPP?

Accounting for market imperfections like transportation costs, tariffs, and quotas. Signup and view all the answers

What is the purpose of a forward contract in a foreign currency transaction?

To hedge against the exchange rate risk. Signup and view all the answers

Study Notes

Globalization and International Business

Globalization is the interconnectedness of people and businesses across the world, leading to cultural, political, and economic integration.
It enables the easy movement and communication with others worldwide to conduct international business.

International Finance and Trade

Global finance refers to financial activities and markets on a worldwide scale.
International trade is the exchange of capital, goods, and services across international borders or territories.
Free trade is international trade without tariffs, quotas, or other restrictions.

Exchange Rates and Currency

The exchange rate represents the number of units of one currency that exchanges for a unit of another.
Currency appreciation occurs when a currency's value rises in terms of another currency.
Currency depreciation occurs when a currency's value falls in terms of another currency.
Arbitrage involves buying a product at a low price and selling it at a higher price to make a profit.
Currency arbitrage is a financial strategy that involves buying a currency at a lower exchange rate and selling it at a higher rate in another market.

Trade and Risks

Buyer risks involve searching and verifying new clients, which can be time-consuming.
Delivery price is the agreed-upon price, equal to the forward exchange rate at the time the contract is entered into.
Transaction exposure measures gains or losses from settling financial obligations stated in a foreign currency.
Backlog exposure occurs when a product has not yet been shipped or billed, creating potential exposure.

Balance of Trade and Payments

Balance of trade is the difference in value between a country's imports and exports.
Balance of payments is a statistical record of a country's transactions with the rest of the world.
Balance-of-payments accounting is a statistical record of a country's international transactions presented in double-entry bookkeeping format.

Corporate Governance and Parity Conditions

Corporate governance refers to the system of rules, practices, and structures by which a company is directed and controlled.
Parity condition defines a relationship between economic variables predicted to hold based on rational economic behavior.
Purchasing power parity (PPP) states that prices of the same basket of products in two countries should be equal when measured in common currency.

Interest Rate Parity and International Fisher Effect

Interest rate parity states that the interest rate differential between two countries should approximate the forward differential in an efficient market.
International Fisher effect combines the conditions underlying PPP and interest rate parity.

Exchange Rate Regimes

Pegged exchange rate is a type of exchange rate regime where a currency's value is fixed against another country's currency or a basket of currencies.
Dirty float exists when a country tries to hold the value of its currency within a range of a reference currency.
Fixed exchange occurs when countries fix their currencies against each other at a mutually agreed-upon exchange rate.
Gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold.

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Description

Review key concepts in globalization, global finance, and exchange rates. Understand the interconnectedness of people and businesses across the world and its impact on cultural, political, and economic integration.