IBUS 401- EXAM 1
As the case of the $, some other currencies may weaken too and
therefore US companies do not have an comparative advantage
impact of other weak currencies
Many trade transactions are prearranged and cannot be adjusted
immediately
Prearranged International Transactions
Most of the international trade is intra-company trade and
therefore the impact of exchange rate movements is very limited
Intra-company trade
Capital flows usually represent:
portfolio investment or direct foreign investment
The DFI positions inside and outside the US have risen
substantially over time, indicating
increasing globalization
Factors affecting the DFI
- changes in restrictions
- privatization
- potential economic growth
- tax rates
- exchange rates
factors affecting international capital flows
- taxes rates on interest or dividends
- interest rates
- exchange rates
,New opportunities from the removal of government barriers
Changes in restrictions
DFI has also been stimulated by the selling of government
operations
Privatization
Countries with higher potential economic growth are more likely
to attract DFI
Potential Economic growth
Countries that impose relatively low tax rates on corporate
earnings are more likely to attract DFI
Tax Rates
Firms will typically prefer to invest their funds in a country when
that country's currency is expected to strength
Exchange Rates
Investors will normally prefer countries where the tax rates are
relatively low
Tax Rates Interest or Dividends
Money tends to flow to countries with high interest rates
Interest Rates
Foreign investors may be attracted if the local currency is
expected to strengthen
Exchange rates
Exchange rate systems can be classified according to the degree to
which the rates are controlled by the...
government
, Exchange rate systems normally fall into one of the following
categories:
- fixed
- freely flowing
- managed float
- pegged
Exchange rate are either held constant or allowed to fluctuated
only within very narrow bands
Fixed exchange rate systems
Exchange rates are determined solely by market forces without
governmental intervention
Freely floating exchange rate systems
Exchange rates are allowed to move freely on a daily basis and no
official boundaries exist. However, governments may intervene to
prevent the rates from moving too much in a certain direction
(Gov.'s can also manipulate its exchange rates such that its own
country benefits at the expense of others)
Managed (dirty) float exchange rate systems
bid-ask spread
((ask-bid)/ask) * 100
If a US firm desires to avoid the risk from exchange rate
fluctuations, and it is receiving 100,000 in 90 days, it could:
Obtain a 90-day forward sale contract on euros
The markets for real or financial assets are prevented from
complete integration by barriers such as_________:
As the case of the $, some other currencies may weaken too and
therefore US companies do not have an comparative advantage
impact of other weak currencies
Many trade transactions are prearranged and cannot be adjusted
immediately
Prearranged International Transactions
Most of the international trade is intra-company trade and
therefore the impact of exchange rate movements is very limited
Intra-company trade
Capital flows usually represent:
portfolio investment or direct foreign investment
The DFI positions inside and outside the US have risen
substantially over time, indicating
increasing globalization
Factors affecting the DFI
- changes in restrictions
- privatization
- potential economic growth
- tax rates
- exchange rates
factors affecting international capital flows
- taxes rates on interest or dividends
- interest rates
- exchange rates
,New opportunities from the removal of government barriers
Changes in restrictions
DFI has also been stimulated by the selling of government
operations
Privatization
Countries with higher potential economic growth are more likely
to attract DFI
Potential Economic growth
Countries that impose relatively low tax rates on corporate
earnings are more likely to attract DFI
Tax Rates
Firms will typically prefer to invest their funds in a country when
that country's currency is expected to strength
Exchange Rates
Investors will normally prefer countries where the tax rates are
relatively low
Tax Rates Interest or Dividends
Money tends to flow to countries with high interest rates
Interest Rates
Foreign investors may be attracted if the local currency is
expected to strengthen
Exchange rates
Exchange rate systems can be classified according to the degree to
which the rates are controlled by the...
government
, Exchange rate systems normally fall into one of the following
categories:
- fixed
- freely flowing
- managed float
- pegged
Exchange rate are either held constant or allowed to fluctuated
only within very narrow bands
Fixed exchange rate systems
Exchange rates are determined solely by market forces without
governmental intervention
Freely floating exchange rate systems
Exchange rates are allowed to move freely on a daily basis and no
official boundaries exist. However, governments may intervene to
prevent the rates from moving too much in a certain direction
(Gov.'s can also manipulate its exchange rates such that its own
country benefits at the expense of others)
Managed (dirty) float exchange rate systems
bid-ask spread
((ask-bid)/ask) * 100
If a US firm desires to avoid the risk from exchange rate
fluctuations, and it is receiving 100,000 in 90 days, it could:
Obtain a 90-day forward sale contract on euros
The markets for real or financial assets are prevented from
complete integration by barriers such as_________:
