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48 Cards in this Set
- Front
- Back
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How firms engage in international Business
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International Trade, Licensing, Franchising, Joint Ventures, Acquisitions, and Establishing New Foreign Subsidiary
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International Trade
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Conservative used to penetrate markets by exporting or importing. Places non of a firms capital at risk.
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Franchising
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Firm provides its technology (copyrights,patents,trade names) in exchange for revenue fees or other benefits. Use tech in other country without transportation cost and investment. Firm may lose quality control
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Joint Ventures
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Venture jointly owned and operated by two or more firms (typically one firm resides in the desired market) and each firm applies its comparative advantage.
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Acquisitions
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Acquire other firms in foreign country to penetrate foreign market. Have full control over the acquired business. Subject to risk and large loss, involves large investment.
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Establish new Foreign Subsidiary
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Establishing new operation in foreign countries to produce and sell their products. Risky and involves large investment.
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Direct Foreign Investment
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Any method of increasing international business that involes direct investment in foreign operations .
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Least Risky International Business Strategy
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International Trade and Franchising
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Most Risky
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Acquisitions and Establishing Subsidiary (DFI)
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How to reduce agency costs?
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Provide managers with stock in the MNC as part of their compensation…
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Currency Exchange Conversion
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Foreign $ * Spot Price = Amount of home $ for 1 foreign $.
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Exchange rate risk b/w MNC and Subsidiary.
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Home $ rises its current account decreases because foreign demand for homes goods decreases (exports decrease). Foreign $ rises, homes current account increases because foreigns demand for homes good increases
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Which risk is always present for national and international corporations
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Interest rate risk and business risk
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Things to eliminate interest rate risk
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Current Account
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Purchases between one specified country and all other countries for goods and services (tangible products and tourism/consulting), factor income (Interest/Dividend Payments) on foreign securities, transfers (grants/aids). Net of Cash inflows and outflows
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Tariffs
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Tax Restrictions on importing making the price of foreign goods higher.
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Quota
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Maximum amount a country can import
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Impact of Cost of Labor on international trade flow
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Countries where labor costs are low have an advantage when competing globally in labor intensive industries (china)
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Impact of Inflation on international trade flow
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If inflation increases relative to the country it trades with, its current account will decrease (consumers will buy in foreign markets because prices arent rising as fast)
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Impact of Government policy on international trade
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Governments want to increase a countries exports because it generates production and income. (restricts its imports with tariffs and quotas, impacts exports by its stance on piracy/offer low cost subsidies)
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Impact of piracy restrictions on international trade
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A government can decrease imports by its lack of restrictions on piracy.
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Weaker home $ can reduce the balance of trade deficit (increase inflows and decrease outflows)
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Homes goods are cheap because of weakening home $, this makes foreign countries with stronger $ import.
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J-Curve
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Bretton Woods Agreement
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Called for fixed exchange rates between currencies. Prevent exchange rate changes from movine more than 1%.
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Gold Standard
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Currency converts to gold at a specific rate. The exchange rates between two currencies determined relative to their convertibility rates per ounce of gold
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Spot Market
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Market where Foreign exchange transaction is for immediate exchange rate (spot rate).
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Futures contract
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right and obligation buy/sell on an exchange, specifies standard volume of a currency to be exchanged on a specific date. Used to hedge an MNC's position. Standardized, sold over an exchange
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Forward
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right and obligation buy/sell over the counter. Can be tailored, sold between MNC and financial institution
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Put
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right to sell an derivative
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Call
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right to buy a derivative
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Direct quotation
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Quotations that reflect currency in US dollars
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Indirect quote
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Quotations that reflect currency in number of units of a foreign currency. This is the reciprocal of the corresponding direct quote.
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Currency Cross rate
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Two non dollar currency's from a dollar quotation. Take value of desired $ in terms of USD / other $ in terms of USD to find the value of desired $ in terms of the other $.
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ADR American Depository Receipts
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Way to obtain equity financing, certificates representing bundles of stock. Gets around some disclosure requirements. ADR should move with the moves in the stock on the foreign stock exchange.
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Bid/Ask
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Bid is the rate at which banks buy currency for, Ask is the rate at which banks sell currency for. Ask is always more than the Bid.
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LIBOR (Londo Inter Bank Offer Rate)
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Floating loan that minimizes interest rate risk, the rate commonly charged for loans between banks.
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Real/Nominal
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Nominal is the real rate adjusted for inflation (Nominal = real rate +inflation)
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US Inflation rises and exchange rates
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Demand for foreign goods Increases, demand for foreign currency increases, supply of foreign currency decreases, US exchange rate increases.
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US Interest rates rise and exchange rates
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Demand for US investments Increases, demand for foregin currency decreases, supply of foreign currency increases, US exchange rates decrease.
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US Relative income rises and exchange rates
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Demand for foreign currency increases, supply of foreign currency doesn’t change, US exchange rates rise
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US Government Controls Increase
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Demand for foreign decrease, the supply of foreign does not change, the exchange rate decreases
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Forward Discount Premium
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F = S(1+p)
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In terms of receivables an options, the last the you want is a ____ and a ____ protects you against this
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decrease in exchange, put (protects against a downturn in the market)
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What is most important for the financial markets regarding consumption smoothing
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Liquidity
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If there is no transaction cost the forward, the futures, and the spot price will be the same
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