Chap. 1: Introduction: Multinational Enterprise and Multinational Financial Management

Terms

multinational corporation
• absolute advantage
• comparative advantage
• internationalization
• foreign direct investment: the acquisition abroad of companies, property, or physical assets such as plant and equipment
• reverse foreign investment
• global manager
• arbitrage
• market efficiency
• capital asset pricing model

• systematic or undiversifiable risk
• unsystematic or diversifiable risk
• terms of trade

Short Questions

• What is the meaning of absolute advantage? Explain.
• What is the meaning of comparative advantage? Explain.
• Explain the Hecksher-Ohlin Theory of Factor Proportions.
• Explain Porter’s theory of national competitive advantage.
• Explain the product cycle theory of trade.
• How might countries creative competitive advantages?

Chap. 2: The Determination of Exchange Rates

Terms

exchange rate
• devaluation
• pegged currency
• revaluation
• floating currency
• equilibrium exchange rate
• spot rate
• forward rate
• reference currency
• appreciation
• depreciation
• bid rate: the price in one currency at which a dealer will buy another currency
• ask rate: the price in one currency at which a dealer will sell another currency
• nominal interest rate
• real interest rate
• asset market model of exchange rate determination
• moral hazard
• liquidity
• store of value
• central bank
• fiat money: a system where the currency that is legal tender is not back by commodities or other reserve currencies, but simply by the peoples’ faith in the government.
• monetizing the deficit
• currency board: a system where the central bank issues notes and coins that are convertible on demand and at a fixed rate into a foreign reserve currency.
• dollarization
• seigniorage: The amount of goods and services that the government obtains by printing new money in a given period.
• real exchange rate
• nominal exchange rate
• foreign exchange market intervention: offical purchases and sales of foreign exchange that national undertake through their central banks to influence their currencies.
• sterilized intervention: intervention by central banks to affect the exchange rate, accompanied by open-market operations domestically to offset the impact of the currency market intervention on domestic money supply.
• monetary base
• open-market operation

Short Questions

• What are the primary factors that affect the determination of exchange rates?
• Explain how relative inflation rates in the two countries influence the determination of the exchange rate.
• Explain how relative economic growth rates in the two countries influence the determination of the exchange rate.
• Explain how relative real interest rates in the two countries influence the determination of the exchange rate.
• Explain how relative political and economic risks in the two countries influence the determination of the exchange rate.
• Explain the Asset Market Model of Exchange Rates.
• What are the primary functions of money? How are do these functions explain the exchange rate?
• Why is it important that a country’s central bank be independent in maintaining that country’s currency value?
• Explain how dollarization and currency boards can be used to offset the weak reputation of a country’s central bank in maintaining currency strength.
• How does dollarization affect seignorage?
• Why do countries intervene in foreign exchange markets?
• What is the difference between sterilized and unsterilized intervention?
• How does the disequilibrium theory of exchange rates explain the overshooting phenomenon?

Formulas and Computational Issues

• Computatation of Currency Appreciation and Depreciation.

Chap. 3: The International Monetary System

Terms

international monetary system: the set of policies, institutions, practices, regulations, and mechanisms that determine the rate at which one currency is exchanged for another.
• free float
• managed float
• dirty float: A system of floating exchange rates in which a government may intervene to change the direction of the value of the country’s currency; this differs from a managed float policy, in that it may not be the explicit and avowed policy of the government to intervene to affect currency rates.
• fixed-rate system
• target-zone arrangement: a monetary system under which countries pledge to maintain theeir exchange rates within a specific margin around agreed-upon, fixed central exchange rates.
• par value
• austerity
• gold standard
• price-specie-flow mechanism
• beggar-thy-neighbor devaluation: devaluation of its currency by one country to increase its exports at others’ expense and to reduce imports — often leads to a price war.
• International Monetary Fund
• International Bank for Reconstruction and Development (World Bank)
• lender of last resort
• Bank of International Settlements: central bank for the industrial countries’ central banks; helps central banks manage and invest their foreign exchange reserves, and in cooperation with the IMF and the World Bank, helps the central banks of developing countries. It also holds deposits of central banks.
• Bretton Woods Agreement
• Smithsonian Agreement
• G-5 nations
• Plaza Agreement
• G-7 nations
• Louvre Accord
• European Monetary System (EMS)
• European Community (EC) or Common Market
• European Currency Unit (ECU)
• monetary union
• European Central Bank
• privatization: selling off state-owned enterprises.
• optimum currency area: largest area in which it makes sense to have a single currency. Defined as that area for which the cost of having an additional currency — higher costs of doing business and greater currency risk — just balances the benefits of another currency — reduced vulnerability to economic shocks associated with the option to change the area’s exchange rate.
• conditionality

Short Questions

• What are the different exchange-rate market mechanisms?
• How does a free float market work?
• How does managed floating work?
• What are the objectives of a managed float?
• How does a target-zone arrangement work?
• How does a fixed-rate system work?
• How did the classical gold standard system work in maintaining equilbrium?
• How does a currency area work?
• Compare and contrast the US as a currency area with the European Union.
• Why, do you think, has real exchange rate volatility increased with free currency markets, rather than decreasing, as was expected?

Chap. 4: Parity Conditions in International Finance and Currency Forecasting

Fisher Effect
• International Fisher Effect
• Purchasing Power Parity
• interest rate parity
• covered interest arbitrage
• unbiased forward rate
• peso problem