International Business Final Exam Study Guide PDF

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Answers to questions that were used for the final exam study guide....

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Final Exam Review Questions 1. What is meant by the phrases “the dollar is selling at a discount” on the 30-day forward market and “the dollar is selling at a premium” on the 30-day forward market? -

When we say “the dollar is selling” in relation to the 30- day market, we are discussing its predicted appreciation and depreciation in those 30 days. When a currency is ‘selling at a discount’ it indicates that the currency depreciated. When a currency is ‘selling at a premium’ it indicates that the currency appreciated.

2. What is the law of one price? -

The law of one price states that in a competitive market free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

3. Discuss the failure of PPP theory to predict exchange rates accurately. What is the purchasing power parity puzzle? -

The PPP puzzle is the failure to find a strong link between relative inflation rates and exchange rate movements. This is because the PPP theory assumes away transportation costs and barriers to trade, which are significant factors and tend to create significant price differences between countries.

4. Explain the events that led to the failure of the Bretton Woods system of fixed exchange rates. -

The weakness of the Bretton Wood’s system was its reliance on the dollar not devaluing. When the President at the time increased money supply, which caused inflation to rise about 5% in 2 years, and more money was spent on imported goods, the system began to collapse. Then the next president announced that the dollar was no longer convertible with gold, and implemented a tax on imports. Forced to not have their currencies appreciate against the dollar, many developed countries became floating currency against the dollar.

5. Compare and contrast a pegged exchange system with a managed float (or dirty-float) system of exchange rates.

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Pegged exchange rate systems have currencies peg its own value to a majority currency so that the rise and fall of the majority currency also occurs to theirs. The imposition of another country’s monetary policy is said to lead to low inflation.

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A dirty-float system has a country’s currency is nominally allowed to float freely against other currencies, but in which the government can intervene and buy/sell currency if they believe their currency has deviated too far from its fair value.

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The main difference between the two is the difference in monetary control each currency’s government has over it.

6. With the help of an example, explain how balance-of-trade equilibrium is maintained under the gold standard. -

balance-of-trade equilibrium is reached when the income a nation’s residents earn exports equals money paid for imports.

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when there is a trade surplus in a country, say japan, there is a net flow of gold from the united states to japan. Thus, these gold flows automatically reduce the U.S. money supply and increases Japan's money supply.

7. Discuss two main arguments that favor a floating exchange rate system against a fixed exchange rate system. 8. Present three common arguments that favor fixed exchange rates. 9. Recent policies of the International Monetary Fund have drawn a lot of criticism. Discuss these criticisms. 10. What are first-mover advantages? Discuss these advantages. 11. Two countries, Great Britain and the U.S., produce just one good: beef. Suppose that the price of beef in the U.S. is $2.80 per pound, and in Britain it is £3.70 per pound. According to PPP theory, what should the $/£ spot exchange rate be? 12. You are the CFO of a U.S. firm whose wholly owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of your analysts told you that the Mexican

peso is expected to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year. What actions, if any, should you take? 13. Do you think the standard IMF policy prescriptions of tight monetary policy and reduced government spending are always appropriate for developing nations experiencing a currency crisis? How might the IMF change its approach? What would the implications be for international business? 14. Debate the relative merits of fixed and floating exchange rate regimes. From the perspective of an international business, what are the most important criteria for choosing between the systems? Which system is the more desirable for an international Business? 15. Imagine that Canada, the United States, and Mexico decide to adopt a fixed exchange rate system. What would be the likely consequences of such a system for (a) international businesses, and (b) the flow of trade and investment among the three Countries? 16. Discuss four strategic ways in which companies can attempt to achieve market growth? 17. What is the purpose of a SWOT analysis? Describe the four quadrants...