If a country experiences high inflation relative to the U.S., its exports to the U.S.
should _, its imports should _, and there is
_ pressure on its currencys equilibrium value.
decrease; increase; upward
decrease; decrease; upward
Lecture 2: Balance of Payments
1. Be familiar with definitions in the international accounts
2. Be able to analyze international accts
-health of country /causes of trade imbalances/currency implications
3. Discuss solutions to trade imbalance
International Monetary Systems
1. Outline the role of the government in influencing currency value thru fiscal, monetary, and
2. Be able to explain in your own words the different currency arrangements and how they
B. INTERNATIONAL FISHER EFFECT (PPP version for financial assets)
nominal interest rates reflect real return and inflation expectations;
over LR, real rate of return the same in most countries
Intl Fisher Effect:
-if nominal rates differ
Financial Statement Analysis
Which is the better investment?
When choosing a company to invest in, it is best to avoid brand name bias and
choose the company that, according to its books, is the most effi
CURRENCY VALUE: PARITY RELATIONS
Objectives: You should be able to:
explain four basic parity theories (PPP, IRP, IFE, and FP unbiased) in own words
outline the reasons that PPP may not hold (e.g., taxes, tariffs, etc.)
do the arbitrag
Questions on currency parity theories
2. If a country experiences an increase in interest rates relative to U.S. interest rates, the
inflow of U.S. funds to purchase its securities should _, the outflow of its
funds to purchase U.S. securities should _, a
1. The primary component of the current account is:
a. unilateral transfers
c. the balance of trade
d. portfolio investment
2. If Goldman Sachs sells merger and acquisition advice to a German firm, it will show
up in the balance of payments account
A weak dollar can normally be expected to result in:
A) high unemployment and high inflation in the U.S.
B) high unemployment and low inflation in the U.S.
C) low unemployment and low inflation in the U.S.
D) low unemployment and high inflation in the
Should be able to:
1. Explain the transactions that takes place in 3 different markets (spot, forward, and
2. Use quote systems: show which currency is being priced (reference); distinguish
between European quote and its
Questions on Forex Trading:
1. Utah Banks bid price for Canadian dollars is $.7938 and its ask price is $.81. What is the
bid/ask percentage spread?
2. Compute the bid/ask percentage spread for Mexican peso retail transactions in which the ask
rate is $.1
1. The commonly accepted goal of the MNC is to:
A) maximize short-term earnings.
B) maximize shareholder wealth.
C) minimize risk.
D) A and C.
E) maximize international sales.
2. Which of the following is an example of direct foreign investment?
INTRODUCTION TO INTERNATIONAL FINANCE
Objectives: Should be able to:
1. Answer the basic 3 questions: what makes a successful multinational?; what country should a firm choose to
enter?; what entry strategy should the MNC choose (and why)?
2. Define the O
2a. Comparative advantage is a necessary aspect of international commerce, because
given certain labor and monetary differences, each country has certain advantages over
others; therefore, it is worth to specialize in certain things and trade in
TO: Prof. Cole
FROM: Group 4 (Connolly, Nolan, and Pav)
DATE: Jan. 20, 2016
SUBJECT: Grand Metropolitan Case
KEY ISSUES (WITH SOLUTIONS): There are eight key issues involved in our decision to recommend that
Grand Metropolitan use a WACC of 6.27% for USD