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INTB 200 FINAL 2025 |ALL QUESTIONS 100% SOLVED| VERIFIED EXAM WITH SOLUTIONS
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European Free Trade Association (EFTA) Norway, Iceland, Liechtenstein, and Switzerland North American Free Trade Agreement (NAFTA) U.S., Canada, Mexico Credited with helping create increased political stability in Mexico Andean Community Bolivia, Columbia, Ecuador, Peru MERCUSOR Brazil, Argentina, Paraguay, Uruguay Originated in 1988 as a free trade pact between Brazil and Argentina Expanded in 1990 to include Paraguay Expanded in 2005 to include Venezuela May be creating trade diversion 27 Amount of members in European Union
European Economic Community 1957, goal of becoming a common market, formed at Treaty of Rome Single European Act 1987, work toward establishment of a single market Maastricht Treaty Committed the EU to adopt a single currency Used by 17 of 27 member states Britain, Denmark, Sweden opted out 2007 Bulgaria and Romania joined EU Association of Southeast Asian Nations (ASEAN) Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, Cambodia Foster free trade between member countries and cooperation in their industrial policies
Trade diversion Occurs when low cost producers within the free trade area replace high cost domestic producers Trade creation Occurs when high cost suppliers within the free trade area replace lower cost external suppliers European Council Ultimate controlling authority within the EU European Commission Responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states European Parliament Debates legislation proposed by the commission and forwarded to it by the council Court of Justice Supreme appeals court for EU law
Ten countries joined, expanding the EU to 25 states Turkey Denied full membership because of concerns over human rights Andean Pact Formed in 1969 using the EU model Re-launched in 1990, operates as a customs union Renamed the Andean Community in 1997 Central American Trade Agreement (CAFTA) To lower trade barriers between the U.S. and members CARICOM 1973 Establish a customs union Six members formed the Caribbean Single Market and Economy (CSME) --> 2006
Cons of REI Business environment becomes competitive Risk of being shut out of the single market by the creation of a trade fortress Foreign Exchange Market Used to convert the currency of one country into the currency of another Provides some insurance against foreign exchange risk (the adverse consequences of unpredictable changes in exchange rates) Exchange Rate Rate at which one currency is converted into another Firms use foreign exchange market when
The possibility that unpredicted changes in future exchange rates will have adverse consequences for the firm Hedging A firm that insures itself against foreign exchange risk Spot exchange rate The rate at which a foreign exchange dealer converts one currency into another currency on a particular day Change continually Forward exchanges Two parties agree to exchange currency and execute the deal at some specific date in the future Forward exchange rate Rate used for forward exchanges Typically quoted for 30, 90, or 180 days into the future Currency swap
Purchasing power parity theory (PPP) Given relatively efficient markets the price of a basket of goods should be roughly equivalent in each country Efficient markets A market with no impediments to the free flow of goods and services Positive Type of relationship between the inflation rate and the level of money supply (when the growth in the money supply is greater than the growth in output, inflation will occur) When is PPP useful?
Bandwagon Effect
Countertrade Barter-like agreements where goods and services are traded for other goods and services Involves less than 10% of world trade Transaction exposure The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values Translation exposure The impact of currency exchange rate changes on the reported financial statements of a company Economic exposure The extent to which a firm's future international earning power is affected by changes in exchange rates How can managers minimize exchange rate risk? Buy forward Use swaps Lead and lag payable and receivables
Lead strategy Attempt to collect foreign currency receivables early when a foreign currency is expected to depreciate and pay foreign currency payables before they are due when a currency is expected to appreciate Lag strategy Delay collection of foreign currency receivables if that currency is expected to appreciate and delay payables if the currency is expected to depreciate International Monetary System The institutional arrangements that countries adopt to govern exchange rates Floating exchange rate system
Banking crisis A loss of confidence in the banking system leads to a run on the banks, as individuals and companies withdraw their deposits Foreign debt crisis A country cannot service its foreign debt obligations, whether private sector or government debt (Greece and Ireland 2010) Mexican Currency Crisis of 1995
Critics of IMF