Quick Study Questions
Quick Study 1
1. Q: What is the purpose of the international capital market?
A: First, it expands the money supply for borrowers. Companies unable to obtain funds from
investors in the domestic market can seek financing in the international capital market. The
Second, it reduces the cost of money for borrowers. The “price” of money is determined
Third, it reduces risk for lenders. The international capital market expands the available
set of lending opportunities. Investors enjoy a greater set of opportunities from which to choose.
2. Q: Unbundling and repacking hard-to-trade financial assets into more marketable financial
instruments is called what?
A: Securitization is the unbundling and repacking of hard to trade financial assets into more
3. Q: What is the characteristic of an offshore financial center?
A: An offshore financial center is a country or territory whose financial sector features very few
regulations and few, if any, taxes. Offshore financial centers offer large amounts of funding in
many currencies and are a cheap source of financing for multinationals. They tend to be
Quick Study 2
1. Q: What type of financial instrument is traded in the international bond market?
A: The international bond market is the market consisting of all bonds sold by issuing
companies, governments, or other organizations outside their own countries. The international
bond market is growing at about 10 percent per year. The most important factor fueling the
2. Q: The market of all stocks bought and sold outside the issuer’s home country is called what?
A: The international equity market consists of all stocks bought and sold outside the issuer’s
own borders are Frankfurt, London, and New York.
3. Q: What does the Eurocurrency market consist of?
A: All the world’s currencies that are banked outside their countries of origin are referred to as
Eurocurrency and traded on the Eurocurrency market. For example, U.S. dollars deposited in
Tokyo’s Sumitomo Bank are called Eurodollars, and British pounds deposited in New York’s
Because the world’s largest financial institutions operate in the Eurocurrency market,
The main appeal of the Eurocurrency market is the complete absence of regulation—
Quick Study 3
1. Q: What is the market in which currencies are bought and sold and their prices determined?
A: To exchange one currency for another in international transactions, companies rely on a
sold and their prices determined.
2. Q: Insuring against potential losses that may result from adverse changes in exchange rates is
called what?
A: The practice of insuring against potential losses that result from adverse changes in exchange
rates is called currency hedging.
3. Q: What do we call the instantaneous purchase and sale of a currency in different markets to
make a profit?
A: Currency arbitrage is the instantaneous purchase and sale of a currency in different markets
to make a profit.
Quick Study 4
1. Q: The numerator in a quoted exchange rate, or the currency with which another currency is to
be purchased is called what?
A: When you designate any exchange rate, the quoted currency is always the numerator, and the
base currency is the denominator.
2. Q: What is the name given to the risk of adverse changes in exchange rates?
A: Exchange rate risk is the risk of adverse changes in exchange rates.
3. Q: What do we call an exchange rate requiring delivery of a traded currency within two
business days?
A: A spot rate is the exchange rate that requires delivery of the traded currency within two
business days. The spot rate is available only to banks and foreign exchange brokers because
4. Q: What instruments are used in the forward market?
A: A forward contract is a contract in which two parties agree to exchange currencies on a
specified future date. Forward rates are helpful to a company that knows it will need a certain
amount of currency on a certain future date. Companies often use the forward market to insure
Quick Study 5
1. Q: Where does more than half of all global currency trading take place?
A: The world’s main foreign exchange trading centers are located in the United Kingdom
(London), the United States (New York), and Japan (Tokyo)—together accounting for slightly
more than one-half of all global currency trading. London dominates the foreign exchange
2. Q: A currency used as an intermediary to convert funds between two other currencies is called
what?
A: A vehicle currency is used as an intermediary to convert funds between two other currencies.
3. Q: What is another name for a freely convertible currency?
A: A hard currency is another name for a freely convertible currency, one that is accepted by
4. Q: Why do governments sometimes engage in currency restrictions?
A: Reasons nations restrict currency conversion:
1. Preserve a country’s reserve of hard currencies with which to repay debts owned to
other nations.
2. Preserve hard currencies to pay for imports and finance trade deficits.
3. Implement systems of multiple exchange rates that specify higher rates on the imports of
certain goods or on the imports from certain nations.
Ethical Challenge
The goal of government regulation of financial-services industries is to maintain the integrity and
stability of financial systems, thereby protecting both depositors and investors. Regulations include
prohibitions against insider trading, against lending by management to itself or to closely related
entities (called “self-dealing”), and against other transactions in which there is a conflict of interest.
In less than two decades, deregulation transformed the world’s financial markets. It drove competition
and growth in financial sectors and boosted the economies of developed and emerging countries alike.
It also helped bring the international financial system to the brink of a complete collapse. Although it
is also true that intervention in financial markets by government officials helped fuel the financial
bubble that eventually burst.
9-5 Q: What do you see as the “dark side” of deregulation, in terms of business ethics?
A: The dark side of deregulation is the potential for the occurrence of those very things that are
mentioned in the question itself. However, deregulation does not mean the total dismantling of
all regulations, but a reduction in those that are overly burdensome and that create market
9-6 Q: Do you think the recent increase in regulation is effective in helping prevent another global
financial meltdown?
A: This is a good opportunity to discuss extraterritoriality. On the one hand, should the U.S.
government have the right to control and legislate U.S. business activity abroad? And on the
other hand, should U.S. firms be allowed to exploit a loophole and avoid paying their fair share
of taxes? Students supporting the use of an OFC to avoid taxation in national markets must
9-7 Q: Do you think the warning of Adam Smith, one of the first philosophers of capitalism against
the dangers of “colluding producers,” applies to the financial-services sector today?
A: Countries retain the most important regulatory aspects of their legal systems and continue to
support their agencies responsible for oversight of financial services industries. The “colluding
Teaming Up
Research Project. Suppose your team works for a firm that has $10 million in excess cash to invest for
one month. Your team’s task is to invest this money in the foreign exchange market to earn a profit—
holding dollars is not an option. Select the currencies you wish to buy at today’s spot rate, but do not
buy less than $2.5 million of any single currency. Track the spot rate for each of your currencies over
the next month in the business press. On the last day of the month, exchange your currencies at the
day’s spot rate. Calculate your team’s gain or loss over the one-month period. (Your instructor will
determine whether, and how often, currencies may be traded throughout the month.)
A: This project is excellent for instructors who want their students to acquire a better grasp of the
foreign exchange market and the reasons for currency fluctuations. Students should be asked to
research each of the currencies they purchase and pass these reasons on to the instructor at the time of
their initial purchase. Students should also follow the business press to learn the reasons for daily
fluctuations in the value of each currency.
Practicing International Management Case
Should We Cry for Argentina?
9-16 Q: Argentina’s peso was linked to the U.S. dollar through a currency board for ten years before
it was cut loose. Why did Argentina peg its currency to the dollar in the first place?
A: Students can consult business and financial Web sites to update the situation and get
background information on the peso’s link to the dollar. The peso–dollar link contributed to
9-17 Q: Companies encounter many difficulties in adapting their strategies to deal with the effects of
a currency crisis that becomes an economic crash. How did local and international companies
adapt to the business environment at the height of Argentina’s crisis?
A: The Argentine units of U.S. companies, which collect revenues in pesos, had a difficult time
repaying dollar-denominated debts as the peso’s value fell. Parent firms did not rescue their
wait several months or more while the government authorized payments in dollars. Companies
also struggled with new rules that raised taxes on exporters and other cash-rich firms to help the
9-18 Q: What has been the impact on the savings and purchasing power of ordinary citizens?
A: Strapped for cash, the government seized the savings accounts of its citizens and restricted
how much they could withdraw at a time. When street protesters turned violent, they beat up
several politicians and attacked dozens of banks. Many citizens have lost everything because of