Chapter 8—Regional Economic Integration

Chapter 8—Regional Economic Integration -...

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BusAdm 555—Exam 2: Chapter 8—Regional Economic Integration Foreign Exchange When 2 parties agree to exchange currency and execute a deal at some specific date in the future. International Firms-Foreign Ex. Markets To convert export receipts, income received from foreign investments, or income received from licensing agreements. To pay a foreign company for products or services. To invest spare cash for short terms in money markets. For currency speculation. Hedging When a firm protects itself against foreign exchange risk by— 1. Spot exchange rates 2. Forward exchange rates 3. Currency swaps Laws of One Price States that In competitive markets 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. Purchasing Power Parity (PPP) Argues that given relatively efficient markets—markets in which few impediments to international trade and investment exist—the price of a “basket of goods” should be roughly equivalent in each country. Predicts that an exchange rate between 2 currencies should be: Exchange Rate = (Price of Good in Currency 1) / (Price of Good in Currency 2) Predicts that exchange rates in relative prices will result in changes in exchange rates. —When inflation is relatively high, a currency should depreciate. Not completely accurate in estimating exchange rate changes in the short-run, but is relatively accurate in the long-run. Freely Convertible Currency when both residents and non-residents can purchase unlimited amounts of foreign currency with the domestic currency. Extremely Convertible Currency when only non-residents can convert their holdings of domestic currency into a foreign currency. Nonconvertible Currency when both residents and non-residents are prohibited from converting their holdings of domestic currency into a foreign currency. Implications of Exchange Rates
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Chapter 8—Regional Economic Integration -...

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