24 Questions
What is a key challenge for international managers in the global monetary and financial systems?
Fluctuating exchange rates
What was the purpose of introducing the euro in the European Union?
To create a single currency for the EU
What is often overlooked in people's understanding of international trade?
Markets for foreign exchange and capital
What do firms regularly trade to meet their international business obligations?
Leading currencies such as the US dollar, European euro, and Japanese yen
What has intensified as the barriers to global trade and investment have faded?
Monetary and financial activities of firms and nations
What is the topic of this chapter?
The monetary and financial structure that makes trade and investment possible
What is the main function of the foreign exchange market?
To enable firms to meet their international business obligations
Why is it important for internationalizing firms to understand monetary and financial issues?
To mitigate risks and challenges associated with international business
What triggered the acceleration of globalization of finance in the 1990s?
The opening of the former Soviet Union and China to international business
What is the main difference between capital flows and FDI-type investments?
Capital flows are more volatile than FDI-type investments
What percentage of total outstanding U.S. long-term securities are typically held by people outside the United States?
20-25%
What is one of the benefits of inward investment in developing economies?
It stimulates local development of financial markets
What is one of the causes of the growing integration of financial and monetary activity worldwide?
The development of new technologies and payment systems
What is a risk associated with the globalization of financial flows?
Economic difficulties in one country can quickly spread to other countries
What is one of the forms of capital flows pouring into stock markets worldwide?
Pension funds
What is one of the consequences of the growing integration of financial and monetary activity worldwide?
The growth of single-currency systems
What is the primary reason for governments to prevent the conversion of their currency to a hard currency?
To preserve their supply of hard currencies
What happens when residents or foreigners rapidly sell off their holdings in a nation's currency or assets?
Capital flight increases
Why do investors often exchange their holdings in a weakening currency for those of a hard currency?
To avoid losing value due to depreciation
What is the effect of capital flight on a country's ability to service its debt and pay for imports?
It diminishes the country's ability
Why do some developing economies have strict currency convertibility restrictions?
To avoid using currencies altogether
What happened to foreign investors in Venezuela after President Hugo Chavez came to power?
They lost confidence in the economy and withdrew their assets
What is a common occurrence in recent years due to the integration of national economies?
Capital flight
What is the result of capital flight on a country's economy?
It leads to economic instability
Study Notes
Globalization of Finance
- Triggered by rapid growth in world trade and investment, accelerated in the 1990s with the opening of the former Soviet Union and China to international business
- Large flows of capital (pension funds, mutual funds, life insurance investments) pouring into stock markets worldwide
- Firms can access a range of capital markets and financial instruments globally
International Monetary and Financial Environment
- Money flowing abroad as portfolio investments is a relatively new trend
- Volume of flows is enormous, with over 25% of total outstanding U.S. long-term securities held by people outside the United States
- Inward investment increases foreign exchange reserves, reduces the cost of capital, and stimulates local financial market development in developing economies
Causes of Global Financial Integration
- Evolution of monetary and financial regulations worldwide
- Development of new technologies and payment systems
- Increased global and regional interdependence of financial markets
- Growing role of single-currency systems, such as the euro
Risks of Global Financial Integration
- Capital flows are volatile and can be withdrawn easily
- Economic difficulties in one country can quickly spread to others like a contagion
- Capital flight can occur in response to domestic crisis, causing investors to lose confidence in a country's economy
International Business Transactions
- Take place within the global monetary and financial systems
- Fluctuating exchange rates are an important challenge and risk for international managers
European Union's Single Currency
- Aimed to eliminate the problem of fluctuating exchange rates within the EU by introducing a single currency, the euro
- Replaced national currencies (French franc, Spanish peso, Italian lira, etc.) as the means of exchange for doing business in Europe
This quiz covers the acceleration of globalization in the 1990s, triggered by the opening of the former Soviet Union and China to international business, and the large flows of capital in the form of pension funds, mutual funds, and life insurance.
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