Podcast
Questions and Answers
What type of market allows an MNC to lock in an exchange rate for future currency transactions?
What type of market allows an MNC to lock in an exchange rate for future currency transactions?
In the given example, how much did Indiana Co. need to pay for supplies when the euro was worth $1.08?
In the given example, how much did Indiana Co. need to pay for supplies when the euro was worth $1.08?
What is the purpose of a forward contract in foreign exchange transactions?
What is the purpose of a forward contract in foreign exchange transactions?
When making a payment today at a rate of $1.12 per euro, how much will the bank reduce Indiana Co.'s account balance by for €100,000?
When making a payment today at a rate of $1.12 per euro, how much will the bank reduce Indiana Co.'s account balance by for €100,000?
Signup and view all the answers
What is the bid/ask spread in foreign exchange transactions at banks?
What is the bid/ask spread in foreign exchange transactions at banks?
Signup and view all the answers
In a foreign exchange transaction, what does a bank's bid quote represent?
In a foreign exchange transaction, what does a bank's bid quote represent?
Signup and view all the answers
What does a direct quotation represent in foreign exchange?
What does a direct quotation represent in foreign exchange?
Signup and view all the answers
How are currency futures contracts different from forward contracts?
How are currency futures contracts different from forward contracts?
Signup and view all the answers
What does an indirect quotation represent in foreign exchange?
What does an indirect quotation represent in foreign exchange?
Signup and view all the answers
What is a cross exchange rate in foreign exchange?
What is a cross exchange rate in foreign exchange?
Signup and view all the answers
How can the value of one currency in terms of another currency be calculated?
How can the value of one currency in terms of another currency be calculated?
Signup and view all the answers
What do currency options contracts provide?
What do currency options contracts provide?
Signup and view all the answers
What is the main difference between a global bond and a eurobond?
What is the main difference between a global bond and a eurobond?
Signup and view all the answers
How does holding a foreign bond expose an investor to risks?
How does holding a foreign bond expose an investor to risks?
Signup and view all the answers
What distinguishes a samurai bond from a yankee bond?
What distinguishes a samurai bond from a yankee bond?
Signup and view all the answers
What characteristic defines a global bond?
What characteristic defines a global bond?
Signup and view all the answers
Which statement accurately describes a foreign bond?
Which statement accurately describes a foreign bond?
Signup and view all the answers
What distinguishes a eurobond from other types of bonds?
What distinguishes a eurobond from other types of bonds?
Signup and view all the answers
What type of financing do foreign subsidiaries typically engage in for long-term investments?
What type of financing do foreign subsidiaries typically engage in for long-term investments?
Signup and view all the answers
Which method is used to calculate the impact of global financial markets on an MNC's value?
Which method is used to calculate the impact of global financial markets on an MNC's value?
Signup and view all the answers
Which market is primarily used for short-term investments and financing by MNC parent companies?
Which market is primarily used for short-term investments and financing by MNC parent companies?
Signup and view all the answers
What is the main benefit of issuing stock in global markets for an MNC?
What is the main benefit of issuing stock in global markets for an MNC?
Signup and view all the answers
What type of financing is mainly used for long-term investments in an MNC?
What type of financing is mainly used for long-term investments in an MNC?
Signup and view all the answers
Which market has the most significant impact on the cost of borrowing funds in global markets for an MNC?
Which market has the most significant impact on the cost of borrowing funds in global markets for an MNC?
Signup and view all the answers
What was the main criticism of Basel I?
What was the main criticism of Basel I?
Signup and view all the answers
What were the three pillars of risk management introduced by Basel II?
What were the three pillars of risk management introduced by Basel II?
Signup and view all the answers
What was the main objective of Basel II?
What was the main objective of Basel II?
Signup and view all the answers
What was the internal ratings-based (IRB) approach introduced by Basel II?
What was the internal ratings-based (IRB) approach introduced by Basel II?
Signup and view all the answers
What were the key changes introduced by Basel III?
What were the key changes introduced by Basel III?
Signup and view all the answers
What was the main reason for introducing Basel III?
What was the main reason for introducing Basel III?
Signup and view all the answers
Study Notes
Foreign Exchange Markets
- Trading occurs around the clock, with commercial banks or online platforms facilitating exchanges
- The spot market enables immediate exchange of currencies
- The forward market allows Multinational Corporations (MNCs) to lock in exchange rates for future dates
Forward Contracts
- A forward contract is an agreement to buy or sell a certain quantity of currency at a specified future date and exchange rate
- Example: Indiana Co. purchases supplies from Belgo, a Belgian supplier, and locks in the exchange rate for future payments
Foreign Exchange Quotations
- Direct quotations represent the value of a foreign currency in dollars
- Indirect quotations represent the number of units of a foreign currency per dollar
- Direct quote = 1 / Indirect quote
Cross Exchange Rates
- Reflect the amount of one foreign currency per unit of another foreign currency
- Calculated by dividing the value of currency A in dollars by the value of currency B in dollars
Currency Futures and Options Markets
- Currency futures contracts specify a standard volume of a particular currency to be exchanged on a specific settlement date
- Futures contracts are sold on exchanges, unlike forward contracts offered by commercial banks
- Currency options contracts give the right to buy or sell a specific currency at a specific price within a specific period of time
Foreign Bonds
- A foreign bond has three characteristics:
- Issued by a foreign entity
- Traded on a foreign market
- Denominated in a foreign currency
- Examples: samurai bonds (yen-denominated bonds issued in Japan by an American company), bulldog bonds, and yankee bonds
- Global bonds are structured to be offered in both foreign and eurobond markets
Eurobonds
- A bond issued and traded in a country other than the one in which its currency is denominated
- Can be issued by non-European entities to European investors
- Composition of the underwriting syndicate differs from foreign bonds
Impact of Global Financial Markets on an MNC's Value
- Improved global image from issuing stock in global markets
- Cost of borrowing funds in global markets affects an MNC's value
- Formula: Value = Σ [E(CFj,t) x E(ERj,t)] / (1 + k)^t
Basel Accords
- Basel I: Criticized for simplistic risk weighting approach
- Basel II (2004): Introduced three pillars of risk management, including minimum capital requirements, supervisory review, and market discipline
- Basel III (2008-2009): Strengthened capital and liquidity requirements, introduced new regulations to address systemic risks
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Test your knowledge about foreign exchange markets, including spot and forward markets, as well as forward contracts. Explore scenarios involving international transactions and currency exchange rates.
