Money, Banking, and International Finance- A spot against a forward is a particular currency swap. An investor buys currency today
from a bank on the spot market and sells the currency back to the bank on a specific date in
the future. - A currency swap allows a corporation to invest in a foreign country by borrowing from its
local bank. Then the company swaps its debt obligation with a foreign company to get the
currency it needs for investing in another country. - An exporter and importer do not know each other, but can enter a transaction. A bank
creates credit on behalf of the importer, guaranteeing payment. - Eurodollars are U.S. dollars held in foreign bank accounts, while Euroloans and Eurobonds
are debt instruments denominated in dollars. The U.S. dollar is the international currency
and is relatively stronger than other currencies. Dollars have little exchange rate risk. - Banking system connects all countries, but a government is limited in their regulatory
power, when a bank’s business crosses a border. Countries have different deposit insurance,
and regulations, and banks became skilled at circumventing regulation when entering the
international markets.
Answers to Chapter 5 Questions
- Brokers, investment bankers, and organized exchanges. For example, the New York Stock
Exchange is an organized exchange, while bond dealers buy and sell government and
corporate bonds. Finally, Lehman Brothers was an investment bank that bankrupted during
the 2008 Financial Crisis. - The Dow Jones Average is an average of the top, blue-chip stocks on the New York Stock
Exchange. Some stocks rise while other stocks fall. However, a market index shows a trend
of stock prices. - A stock market crash occurs when stock prices reach a peak and quickly plummet. People
and investors hold stock as wealth. If stock prices fall too, then people's wealth disappears.
Furthermore, some investors borrowed to buy stock, and they cannot repay the loans. Thus,
a stock market crash could lead to a financial crisis. - Mutual funds and finance companies. For example, Vanguard offers mutual funds, while
GMAC offers financing for automobiles. - Adverse selection is a person knows he drives recklessly and buys insurance to protect his
car. Moral hazard is a driver become more careless, like leaving his keys in the car. - Insurance companies and pension funds. For example, AIG is a large insurance company,
while TIAA-Cref is a pension company for teachers and professors.