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INTB 200 FINAL 2025 |ALL QUESTIONS 100% SOLVED| VERIFIED EXAM WITH
SOLUTIONS
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 payments they receive for exports, the income they receive from foreign investments, or the income they receive from licensing agreements with foreign firms are in foreign countries
- They must pay a foreign company for its products or services in its country's currency
- They have spare cash that they wish to invest for short terms in money markets
- They are involved in currency speculation (the short term movements of funds from one currency to another in the hopes of profiting from shifts in the exchange rate) Foreign Exchange Risk
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
- A simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
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?
- Most accurate for long run and countries with high inflation/ underdeveloped capital markets
- Less useful for short term Internation Fisher Effect For any two countries the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between two countries
Bandwagon Effect
- Occurs when expectations on the part of traders turn into self-fulfilling prophecies
- Greatly influence short term exchange rate movements Efficient Market School Forward exchange rates do the best possible job of forecasting future spot rates, and, therefore, investing in forecasting services would be a waste of money Inefficient Market School Companies improve the foreign exchange market's estimate of future exchange rates by investing in forecasting services Efficient Market
- Prices reflect all available information
- Forward exchange rates should be unbiased predictors of future spot rates
- Companies should not waste their time on forecasting services Inefficient Market
- Prices do not reflect all available information
- May be worthwhile to invest in forecasting services Fundamental Analysis
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
- When a country allows the foreign exchange market to determine the relative value of a currency
- U.S. dollar, the EU euro, the Japanese yen, and the British pound Pegged exchange rate system
- When a country fixes the value of its currency relative to a reference currency
- Gulf states to the U.S. dollar
- Popular among the world's smaller nations
- Imposes monetary discipline and leads to low inflation
- Can moderate inflationary pressures in a country
- Greatest strength of gold standard Bretton Woods System
- 1944, reps from 44 countries
- Designed a new international monetary system that would facilitate postwar economic growth
- Worked well until the late 1960s Bretton Woods Agreement
- Fixed exchange rate system was established
- All currencies were fixed to gold, but only the US dollar was directly convertible to gold
- Devaluations could not be used for competitive purposes
- A country could not devalue its currency by more than 10% without IMF approval International Monetary Fund (IMF)
- Maintain order in the international monetary system through a combination of discipline and flexibility
- Fixed exchange rates stopped competitive devaluations and brought stability to the world trade environment
- Fixed exchange rate imposed monetary discipline on countries, limiting price inflation
- In cases of fundamental disequilibrium, devaluations were permitted
- The IMF lent foreign currencies to members during short periods of balance-of-payments deficit, when a rapid tightening of monetary or fiscal policy would hurt domestic employment
- lends money in financial crisis World Bank
- Promotes general economic development
- Borrowers pay a market rate of interest, the bank's cost of funds plus a margin for expenses
- IDA loans only go to the poorest countries Factors that led to the collapse of the fixed exchange system
- President Johnson financed both the Great Society and Vietnam by printing money
- High inflation and spending on imports
- On August 8, 1971, Nixon announced the dollar was no longer convertible to gold
- Countries agreed to revalue their currencies against the dollar
- On March 19, 1972, Japan and most of Europe floated their currencies
- In 1973, Bretton Woods failed because the key currency was under speculative attack Jamaica Agreement
- 1976
- Floating rates were declared acceptable
- Gold was abandoned as a reserve asset
- Total annual IMF quotas were increased to $41 billion
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
- high Mexican debts
- A pegged exchange rate that did not allow for natural adjustment of prices
- IMF created a $50 billion aid package Asian Currency Crisis (1997)
- An investment boom
- Excess capacity
- High debts
- Expanding imports
- Thailand allowed their currency to float
- IMF provided a $17 billion bailout loan
- IMF provided a $37 billion aid package for Indonesia
- IMF provided a $55 billion aid package for South Korea
Critics of IMF
- One size fits all approach to macroeconomic policy is inappropriate for many countries
- IMF is exacerbating moral hazard
- IMF has become too powerful for an institution without any real mechanism for accountability Currency management The current system is a manages float, government intervention can influence exchange rate Business strategy Exchange rate movements can have a major impact on the competitive position of a business Corporate government relations Businesses can influence government policy towards the international monetary system Marketing mix The choices the firm offers to its targeted market
- Product attributes
- Distribution strategy
- Communication strategy
