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INTB 200 FULL (DREXEL UNIVERSITY- PROFESSOR RAYCA) FINAL REVIEW 2025
PRACTICE QUESTIONS |CURRENTLY TESTING WITH ACCURATE SOLUTIONS
CAFTA
wanted to lower trade barriers between the US and member states, created in 2005 CARICOM (1973), created as a customs union CSME In 2006, 6 CARICOM members this to lower trade barriers and harmonize macroeconomic and monetary policy between members FTAA (Free Trade of the Americas) April 1988, talks began to create FTAA by 2005 FTAA was not established, support from US and Brazil was mixed US wants stricter enforcement of intellectual property rights Brazil and Argentina want the US to eliminate agriculture subsidies and tariffs If established, it will have major implications for cross-border trade and investment flows within the hemisphere would create a free trade area of 850 million people who accounted for nearly $18 trillion in GDP in 2008
ASEAN (Association of South East Asian Nations) 1967 Includes: Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia wants to foster freer trade between member countries and to achieve some cooperation in their industrial policie AFTA (ASEAN Free TradeAgreement) 2003 includes 6 original member countries of ASEAN ASEAN and AFTA are moving towards establishing a free trade zone APEC (Asian-Pacific Economic Cooperation) has 21 member countries including Japan, China, US wants to increase multilateral cooperation member states account for 55% of the worlds GNP, 49% of the world's trad Economic Integration in Africa Many members are members of more than 1 of the 9 blocks in the region since many countries support the use of trade barriers to protect their economies from foreign competition, meaningful progress is slow
International companies use the foreign exchange market when: the payments they receive for exports, the income they make from foreign investments, or the income they receive from licensing agreements with foreign firms in foreign currencies they must pay a foreign company for its products or services in the country's currency they have spare cash that they wish to invest for short terms in money markets they are involved in currency speculation currency speculation the short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates 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 constantly changes due to the supply and demand of that and other currencies
currency swaps the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates Where currency swap transactions take place international businesses and their banks banks governments when its desirable to move out of one currency into another for a limited period without incurring foreign exchange rate risk Foreign Exchange Markets a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems Most important trading areas London, New York, Zurich, Singapore, Tokyo arbitrage the process of buying a currency low and selling it high
predicts that changes in relative prices will result in a change in exchange rates efficient markets: a market with no impediments to the free flow of goods and services Empirical testing of PPP Theory it is more accurate in the long run, and for countries with high inflation and underdeveloped capital markets it is less useful for predicting short term exchange rate movements between the currencies of advanced industrialized nations that have relatively small differentials in inflation rates International Fischer Effect for any two countries, the spot exchange rate should change in an equal amount but in opposite direction to the difference of nominal interest rates between two countries bandwagon effect occurs when expectations on the part of of traders turn into self-fulfilling prophecies- traders can join the bandwagon and move exchange rates based on group expectations vehicle currency Most transactions involve one currency on one side The Efficient Market School
forward exchange rates do the best possible job of forecasting future spot exchange rates, and, therefore, investing in forecasting services would be a waste of money The Inefficient Market School companies can improve the foreign exchange market's estimate of future exchange rates by investing in forecasting services Efficient Market a market in which prices reflect all available information if the foreign exchange market is efficient then forward exchange rates should be unbiased predictors of future spot rates Most empirical tests confirm the efficient market hypothesis suggesting that companies should not waste their money on forecasting services Inefficient Market a market in which prices do not reflect all available information in an inefficient market, forward exchange rates will not be the best possible predictors of future spot exchange rates and it may be worthwhile for international businesses to invest in forecasting services However, the track record for forecasting services is not good Fundamental Analysis
barter-like agreements where goods and services are traded for other goods and services was more common in the past when more currencies were nonconvertible, but today it involves less than 10% of world trade Regional Economic Integration agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other Levels of Regional Economic Integration
- Free Trade Area
- Customs Union
- Common Market
- Economic Union
- Political Union Free Trade Area eliminates all barriers to the trade of goods and services among member countries ex. NAFTA: US, Canada, Mexico EFTA: Norway, Iceland, Lichtenstein, Switzerland Customs Union eliminates trade barriers between member countries and adopts an external trade policy ex. Andean Community: Peru, Bolivia, Colombia, Ecuador
Common Market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production ex. MERCOSUR: Brazil, Argentina, Paraguay, Uruguay Economic Union has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rate, and a common monetary and fiscal policy ex. The EU Political Union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states ex. The United States Reasons that countries should integrate their economies All countries gain from free trade and investment, regional economic integration is an attempt to exploit the gains from free trade and investment Linking countries together to make them more dependent of each other, creates incentives for political cooperation and reduces the likelihood of violent conflict among member countries, gives countries greater political standings when dealing with other nations
trade diversion occurs when high cost suppliers within the free trade area replace the low cost external supplies trade creation occurs when low cost producers within the free trade area replace the high cost domestic producers The European Council the ultimate controlling authority within the EU The European Commission responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states The European Parliament debates legislation proposed by the commission and forwarded it to by the council The Court of Justice the supreme appeals court for the EU
The Maastricht Treaty committed the EU to adopt a single currency created the second largest currency zone in the world after the US dollar used by 17 of the 27 member states Britain, Denmark, and Sweden opted out Benefits of the Euro savings from having to only handle one currency rather than many easier to compare prices across Europe, making firms more competitive gives a strong boost to the development of highly liquid pan-European capital market increases the range of investment options open to both individuals and institutions Costs of the Euro loss of control over national monetary policy EU is not an optimal currency area Expansion of the EU Several countries have applied for membership 10 countries joined in 2004, making 25 member states Bulgaria and Romania joined in 2007, making 27 member states Turkey has been denied full membership because of concerns over human rights
USA and Canada Benefits of NAFTA access to a large and increasingly prosperous market the lower prices for consumers from goods produced in Mexico low cost labor and the ability to be more competitive on world markets increased imports by Mexico Costs of NAFTA jobs would be lost and wage levels would be lower in the US and Canada pollution would increase due to Mexico's more lax standards Mexico would lose its sovereignty The Andean Community Colombia, Ecuador, Peru, Bolivia The Andean Pact was formed in 1969 after the EU model More or less failed by the mid-1980s Relaunched in 1990, now as a customs union Renamed the Andean Community in 1997 Signed an agreement with MERCOSUR in 2003 to restart negotiations for a free trade area MERCOSUR originated in 1988 as a free trade pact between Brazil and Argentina was expanded in 1990 to include Paraguay and Uruguay, Venezuela added in 2005
may be diverting trade, local firms are investing in industries that are not competitive worldwide initially made progress on reducing trade barriers between member states , but more recently these progressions have stalled What happens if a country's currency is non-convertible? firms may turn to countertrade What are the 3 types of Foreign Exchange Risk? Transaction Exposure Translation Exposure Economic Exposure Transaction Exposure the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies Translation Exposure the impact of currency exchange rate changes on the reported financial statements of a company
delay collection of foreign currency receivables if that currency is expected to appreciate and delay payables if the currency is expected to depreciate How should managers reduce economic exposure? distribute productive assets to various locations so the firm's long-term financial well- being is not severely affected by changes in exchange rates ensure assets are not too concentrated in countries where likely rises in currency values will lead to increases in the foreign prices of the goods and services the firm produces In general, what should managers do? Have central control of exposure to protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies Distinguish between transaction and translation exposure on the one hand, and economic exposure on the other hand Attempt to forecast future exchange rates Establish good reporting systems so the central finance function can regularly monitor the firm's exposure position Produce monthly foreign exchange exposure reports international monetary system the institutional arrangements that countries adopt to govern exchange rates floating exchange rate system
exists when a country allows the foreign exchange market to determine the relative value of a currency the US Dollar, Euro, Japanese Yen, and British Pound all float freely against each other their values are all determined by market forces and fluctuate day-to-day pegged exchange rate system exists when a country fixes the value of its currency relative to a reference currency many Gulf states peg their currencies to the US Dollar dirty float exists when a country tries to hold the value of its currency within some range of a reference currency such as the US dollar China pegs the yuan to a basket of other currencies fixed exchange rate system exists when countries fix their currencies against each other at some mutually agreed on exchange rate European Monetary System (EMS) prior to 1999 gold standard
