The risk that foreign investment profits may disappear when translated into local currency terms because of unanticipated adverse changes in the price of the foreign currency
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In other countries shareholders are viewed as merely one among many "stakeholders" of the firm includingEmployees, suppliers, customersConflicts that arise when managers pursue their own private interests at the expense of shareholders when they are not closely monitoredAgency conflictsis the financial and legal framework for regulating the relationship between a firm's management and its shareholders. The degree of protection of common shareholders' rights varies from country to countryCorporate governanceThe theoretical justification for investing and conducting business at the global scale is theTheory of Comparative Advantage_______________developed the classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country's workers are more efficient at producing every single good than workers in other countriesDavid Ricardoexists when one party can produce a good or service at a lower opportunity cost than another partyComparative advantageThe opportunity cost of making one additional unit of a good (or service) can be defined as the value of some other good that you have to give up in order to produce this additional unitOpportunity costWhen a nation can make a product at a higher quality and faster rate than another, it has anAbsolute advantageshows wine and cheese each country can makeProduction possibilitiesThe gains from trade are shown by the increase in __________________Consumption availableis a multilateral agreement among member countries that has reduced many barriers to tradeGeneral agreement on tariffs and tradehas the power to enforce the rules of international tradeThe World Trade Organizationcalled for phasing out impediments to trade between Canada, Mexico, and the United States over a 15-year period beginning in 1994.The North AMerican Free Trade AgreementBrexitBritons voted to leave the EU. •Likely outcome is a weakening of both the United Kingdom and the European Union. Brexit revealed some of the difficulties with free trade and global economic integrationwas a "double standard" in the sense that both gold and silver were used as moneyBimetallismimplies that the least valuable metal is the one that tends to circulateGresham's Law•The purpose was to design a postwar international monetary system. •The goal was exchange rate stability without the gold standard. The result was the creation of the IMF and the World BankBretton Woods System•Flexible exchange rates were declared acceptable to the IMF members. -Central banks were allowed to intervene in the exchange rate markets to iron out unwarranted volatilities. •Gold was abandoned as an international reserve asset. Non-oil-exporting countries and less-developed countries were given greater access to IMF fundsFlexible exchange ratesThe largest number of countries, about 33, allow market forces to determine their currency's valueFree FloatAbout 46 countries combine government intervention with market forces to set exchange ratesManaged FloatSome countries do not bother printing their own currency. For example, Ecuador, Panama, and El Salvador have dollarized. Montenegro and San Marino use the euroNo national currencyMarket participants include international banks, their customers, nonbank dealers, FX brokers, and central banksClient marketare the transactions where the currencies are exchanged in real time, in the presentSpot Transactionsare the transactions where the terms are determined today (price and quantity) but the actual exchange happens at a predetermined, future dateForward Transactionsthe price of one unit of foreign currency in terms of the home currencyDirect quotethe price of one unit of the home currency in terms of the foreign currencyIndirect quotereflects the amount of one foreign currency per unit of another foreign currencyCross exchange ratethe price at which a bank is willing to buy (and you are willing to sell) a unit of FXBid quotethe price at which a bank is willing to sell (and you are willing to buy) a unit of FXAsk quoteBid Ask SpreadAsk Rate - Bid Rate / Ask RateAn exchange rate represents the price of a currency, which is determined by the demand for that currency relative to the supply for that currencyExchange Rate EquilibriumIs the process of trading out of the local currency into a second currency, then trading it for a third currency, which in turn is traded back for the local currency. The purpose is to earn an arbitrage profit. This is possible when the no-arbitrage currency that can be built using the exchange rates between the second and third currency, o not align with the cross-exchange rate between these currencies in the market.Triangular ArbitrageThe forward market for FX involves agreements to buy and sell foreign currencies in the future at prices agreed upon todayForward Rate Quotationsinvolves buying a currency that has a high rate of interest and funding the purchase by borrowing in a currency with low rates of interest, without any hedgingCurrency carry tradean arbitrage trading strategy where an investor profits off the interest rate differential between two countries by using a forward contract to cover (eliminate exposure to) exchange rate riskCovered interest arbitrageIs the market equilibrium between interest rates in the home and foreign country, and spot and forward currency prices that makes covered interest arbitrage not profitableInterest Rate Parity