Chapter 10 S 23

docx

School

Ferris State University *

*We aren’t endorsed by this school

Course

310

Subject

Economics

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by PresidentTapir2763

INTB 310 S 23 Chapter 10 The Foreign Exchange Market Exercise 10-1 Key Terms NAME _Chris Wollos____________________________ 1. Foreign Exchange Market, p. 310: A decentralization of or over-the-counter market for trading of currency 2. Exchange Rate, p. 310: The value of one currency for the exchange of another. 3. Foreign Exchange Risk, p. 311: The risk that a business’ financial performance or financial position will be affected by changes in the exchange rates between currencies. 4. Currency Speculation, p. 312: When someone buys a foreign currency, not because they need to pay for an import or for investing in foreign business, but because they hope to sell the currency at a higher rate in the future. 5. Carry Trade, p. 313: An investment strategy that’s most often associated with foreign currency trading. 6. Spot Exchange Rate, p. 313: The current exchange rate between two currencies. 7. Forward Exchange, p. 314: The conversion of one country’s currency into another. 8. Forward Exchange Rate, p. 314: The rate at which a bank agrees to exchange one rate for another at a future date when it enters into a forward contractor or investor. 9. Currency Swap, p. 315: An agreement in which two parties exchange the principal amount of a loan and the interest in one currency for the principal and interest in another currency. 10. Arbitrage, p. 316: Trading that exploits the tiny differences in price between identical or similar assets in two or more markets.

11. Law of One Price, p. 318: An economic concept that states that the price of an identical asset or commodity will have the same price globally. 12. Efficient Market, p. 318: How well prices reflect all available information. 13. Fisher Effect, p. 323: Theory created by economist Irving Fisher that describes the relationship between inflation and both real and nominal statistics. 14. IFE, International Fisher Effect, p. 323: States that the difference between interest rates between countries can be used to predict changes in exchange rates. 15. Bandwagon Effect, p. 324: The tendency for people to adopt a certain behaviors, styles or attitudes simply because others are doing so. 16. Inefficient Market, p. 326: When an assets prices do not accurately reflect its true value. 17. Freely Convertible Currency, p. 327: Currency that doesn’t have any government restrictions on currency exchange. 18. Externally Convertible Currency, p. 327: A currency that allows foreigners to exchange the currency into other currencies without any limits. 19. Nonconvertible Currency, p. 327: Currency that is used primarily for domestic transactions and is not openly traded in the FX market. 20. Capital Flight, p. 328: A large-scale exodus of financial assets and capital from a nation due to events such as political or economic instability, currency devaluation or the imposition of capital controls. 21. Countertrade, p. 328:

International trade by exchange of goods rather than by currency purchase. 22. Transaction Exposure, p. 329: The level of uncertainty businesses has involved in international trade face. 23. Translation Exposure, p. 329: The risk that a company’s equities, assets, liabilities, or income will change in value as a result of exchange rate changes. 24. Economic Exposure, p. 329: A measure of change in the future cash flows of a company as a result of unexpected changes in foreign exchange rates. 25. Lead Strategy, p. 330: Any tactic or action that’s used to attract customers to your business in hopes of having them interact with your business. 26. Lag Strategy, p. 330: Increasing capacity only when there is actual increase in demand. Exercise 10-2 Critical Thinking Thoroughly respond to each of the following questions. The interest rate on South Korean government securities with one-year maturity is 4 percent, and the expected inflation rate for the coming year is 2 percent. The interest rate on U.S. Government securities with one-year maturity is 7 percent, and the expected inflation rate is 5 percent. The current spot exchange rate for the Korean Won is $1 = W 1.20. Forecast the spot exchange rate one year from today. Explain the logic of your answer. I’ll take a stab at this, but I’m still confused about the conversion after much research online and in our book. I believe that the spot exchange rate would be best explained as using the Fisher effect, so I think the correct answer would be real interest for South Korea and the US is 2% (4% -2%) and (7% -5%), but I really have no clue and as previously stated, confusing. Re-read the Management Focus “Embraer”, p. 315. What does the recent economic history of Brazil tell you about the relationship between price inflation and exchange rates? What other factors might determine exchange rates for the Brazilian Real? When price inflation rates are very high, the foreign exchange rates for the country’s currency shows a significant decline compared to other well-organized currencies.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Fuel prices are very high for Brazil, and this hasn’t helped with inflation since an increase of this type affects every area of the economy and the country. The reason for their big increase is largely to blame by the Russian invasion of Ukraine. Also, the price of industrial metals, agricultural products and energy commodities have damaged the exchange rates as well. Case 10: Managing Foreign Currency Exposure at 3M. 1. Prepare a summary of this case. 3M generates about two-thirds of its sales from outside of the United States making it very susceptible to foreign currency fluctuations. With the U.S. dollar remaining strong, 3M top line suffered. Because of this 3M took action to rebound from the results and worked at gaining higher earnings in the areas of electronics and energy, safety and graphics, and healthcare to drive more growth. This worked for their company because it would be a larger influence on the global market where the foreign currency exposure would be of greater gain. 2. If the dollar appreciates in value against most other countries over the next year, what will the impact of this be on 3M? 3M has put provisions in place to protect themselves from fluctuations in currency exchange rates. One would be that they would use hedging. This would mean that they hedge their exposure by borrowing from the money market. The company can also buy forward contracts which will help them from suffering from fluctuations in currency. 3. If the dollar depreciates in value against most other countries over the next year, what will the impact be on 3M? I believe I answered this in question 2. Thank 4. Should 3M hedge against adverse movements on foreign exchange rates? How should they do this? As mentioned previously, using hedging would be an asset to 3M because they can borrow and exchange from other money markets. Because they do business with so many countries and many different types of currency, they would already have many arenas that they could use for exchanging and converting. This would make many of their asset’s liquid too as needed. 5. Should it hedge all of its foreign exchange transactions or just a subset? I would think it would never be good to put all of your eggs in one basket. By using several different types of hedging strategies would be helpful in this situation. I’m sure the forecasting that takes place throughout every single day are constant in changes with one currency to the other.

Related Documents

econ_midterm1.rtf

Copy of Economics 2.03 Graphing Skills_Assignment_v23.docx

Copy of Economics 4.02 The Business Cycle_Assignment_v23.docx

Screenshot 2024-02-15 at 10.21.26 PM.png

Chapter 8 Strategy Formulation and Implementation.docx

IMG_2351.png

MAT 240 Project One (Final Edit).docx

CHAPTER 1.docx

Economics 5.02 Fiscal Policy with answers.docx

Economics 4.02 The Business Cycle with answers.docx

MAT 240 RealEstate Data 3-3.xlsx

BUSI1083_Assignment_2_ANSWER_.pdf

Recommended textbooks for you

Exploring Economics

Economics

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:SAGE Publications, Inc

ECON MACRO

Economics

ISBN:9781337000529

Author:William A. McEachern

Publisher:Cengage Learning

ECON MICRO

Economics

ISBN:9781337000536

Author:William A. McEachern

Publisher:Cengage Learning

Microeconomics A Contemporary Intro

Economics

ISBN:9781285635101

Author:MCEACHERN

Publisher:Cengage

Brief Principles of Macroeconomics (MindTap Cours...

Economics

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:Cengage Learning

Principles of Economics 2e

Economics

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:OpenStax

SEE MORE TEXTBOOKS

Recommended textbooks for you

Exploring Economics
Economics
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:SAGE Publications, Inc
ECON MACRO
Economics
ISBN:9781337000529
Author:William A. McEachern
Publisher:Cengage Learning
ECON MICRO
Economics
ISBN:9781337000536
Author:William A. McEachern
Publisher:Cengage Learning
Microeconomics A Contemporary Intro
Economics
ISBN:9781285635101
Author:MCEACHERN
Publisher:Cengage
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Principles of Economics 2e
Economics
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:OpenStax