Unit 1

I. GAP-FILLING
1. The pattern of imports and exports that would result in the absence of trade barriers is
called free trade.
2. first-mover advantages result because economies of scale limit the number of companies
that an industry can sustain.
3. Financial assistance to domestic producers in the form of cash payments, low-interest
loans, tax breaks, product price supports, or some other form is called subsidies.
4. When a government guarantees that it will repay the loan of a company if the company
should default on repayment, it is called a loan guarantee.
5. A designated geographic region in which merchandise is allowed to pass through with
lower customs duties and/or fewer customs procedures is called a (n) foreign trade zone.
6. A tariff is a government tax levied on a product as it enters or leaves a country.
7. A tariff levied by the government of a country that is exporting a product is called an
export tariff.
8. A transit tariff is a tariff levied by the government of a country that a product is passing
through on its final destination.
9. A tariff levied by the government in a country that is importing a product is called an
import tariff.
10. A tariff levied as a percentage of the stated price of an imported product is called ad
valorem tariff.
11. A tariff levied as a specific fee for each unit (measured by number, weight, etc.) of an
imported product is called specific tariff.
12. A tariff levied on an imported product and calculated partly as a percentage of its stated
price, and partly as a specific fee for each unit is referred to as a (n) compound tariff.
13. Restriction on the amount of goods that can enter or leave a country during a certain
period of time is called a quota.
14. Countries normally self-impose a VER in response to the threat of an import tariff or total
ban on a product by an importing nation.
15. A lower tariff rate for a certain quantity of imports and a higher rate for quantities that
exceed the quota is referred to as a (n) tariff-quota.
16. A complete ban on trade (imports and exports) in one or more products with a particular
country is called an embargo.
17. Laws stipulating that a specified amount of a good or service be supplied by producers in
the domestic market are called local content requirements.
18. Regulatory controls or bureaucratic rules designed to impair the rapid flow of imports into
a country are administrative delays.
19. Currency controls can reduce imports by stipulating an exchange rate that is
unfavorable to potential importers.
20. The WTO is the only international body dealing with rules of trade between nations.
21. A key component of the WTO that was carried over from the GATT is the principle of
non discrimination called normal trade relations.
22. When a company exports a product at a price lower than the price normally charged in its
domestic market, it is said to be dumping.
 23. Countervailing duty is an additional tariff placed on an imported product that a nation
believes is receiving an unfair subsidy.
1. A country can produce something more cheaply than anywhere else in the world, it has a
(an) absolute advantage.
2. A country exporting more than it imports has a trade surplus.
3. Autarky is the (impossible) situation in which a country is completely self-sufficient and
has no foreign trade.
4. Countries that export a lot of oil or manufactured goods tend to have a positive balance of
trade.
5. The WTO has established rules for trade between nations.
6. Balance of payments is the difference between what a country pays for all its imports and
receives for all its exports.
7. Mary economists encourage governments to abolish import taxes and have complete free
trade.
8. Exporting and importing are the two aspects of foreign trade: a country spends money on
goods it imports and gains money through its exports.
9. Unlike quotas, tariffs produce revenue for the government.
1. The purchase, sale, or exchange of goods and services across national borders is called
international trade.
2. The trade theory that nations should accumulate financial wealth, usually in the form of
gold, by encouraging exports and discouraging imports is called mercantilism.
3. Trade surplus is the condition that results when the value of a nation’s exports is greater
than the value of imports.
4. A condition that results when the value of a country’s imports is greater than the value of
its exports is called trade deficit.
5. When a nation can only increase its share of wealth at the expense of its neighbors, it is
called a zero-sum game.
6. Absolute advantage is the ability of a nation to produce a good more efficiently than any
other nation.
7. Comparative advantage theory argues that trade is still beneficial even if one country is
less efficient in the production of two goods, so long as it is less inefficient in production of
one of its goods.
8. Factor proportions theory states that countries produce and export goods that require
resources that are abundant and import goods that require resources in short supply.
9. The new trade theory states that (1) there are gains to be had from specialization and
increasing economies of scale, (2) those companies first to enter a market can create barriers
to entry, and (3) the government may have a role to play in assisting its home-based
companies.
10. The economic and strategic advantage gained by being the first company to enter an
industry is called first-mover advantage.
11. The national competitive advantage theory states that a nation’s competitiveness in an
industry depends on the capacity of the industry to innovate and upgrade.
II. Q&A
1. What brings the absolute advantage or comparative advantage to a country?
 Abundant natural resources and raw materials
 Climate
  Cheap or skilled Labour
 High Technology
 Technical Expertise
2. What are the reasons for imposing tariffs?
 Generate revenue for the Government
 Protect domestic / infant industries
 Protect local jobs
 Make imports more expensive than the home-produced substitutes
 Protection against dumping
 Reduce BOP deficits
5. What is the difference between the balance of trade and balance of payments?
BOT includes imports and exports only. BOP considers all business transactions with other
countries including imports and exports of goods and services and money earned from and
paid for services and investments.
6. Why would the government impede free trade?
National Governments have long intervened in the trade of goods and services for reasons that
are political, economic, or cultural.
* Cultural motives:
+ Preserve national identity: Unwanted cultural influence can cause a government to block
imports that it believes are harmful.
(Cultures of countries are slowly altered by exposure to the people and products of other
cultures)
* Political motives:
+ Protect jobs
+ Preserve national security
+ Respond to other nations’ unfair trade practices
+ Gain influence over other nations
* Economic motives
+ Protect infant industries: a country’s emerging industries need protection from international
competition during their development phase until they become sufficiently competitive
internationally. Although conceptually appealing, this argument can cause domestic companies
to become noncompetitive, and inflate prices.
+ Pursue strategic trade policy: Believers in strategic trade policy argue that government
intervention can help companies take advantage of economies of scale and be first movers in
their industries. But government assistance to domestic companies can result in inefficiency,
higher costs, and even trade wars between nations.
7. What are the methods used by the government to restrict trade?
+ Tariffs: A tariff is a government tax levied on a product as it enters or leaves a country.
+ Quotas: A restriction on the amount (measured in units or weight) of a good that can enter or
leave a country during a certain period of time.
+ Embargoes: A complete ban on trade (imports and exports) in one or more products with a
particular country.
+ Local content requirements: Laws stipulating that a specified amount of a good or service be
supplied by producers in the domestic market.
+ Administrative delays: regulatory controls or bureaucratic rules designed to impair the rapid
flow of imports into a country.
 + Currency controls: Restrictions on the convertibility of a currency into other currencies.
8. What are ways of promoting international trade?
+ Subsidy: A subsidy is financial assistance to domestic producers in the form of cash payments,
low-interest loans, tax breaks, product price supports, or some other form.
+ Export financing: Governments can offer export financing - loans to exporters that they would
not otherwise receive or loans at below-market interest rates.
+ Foreign Trade Zones: a designated geographic region in which merchandise is allowed to pass
through with lower customs duties (taxes) and/or fewer customs procedures.
+ Special government agencies: These agencies organize trips abroad for trade officials and
businesspeople and open offices abroad to promote home country exports.
III. ESSAY
1. What are the pros and cons of free trade?
Pros:
 FT increases production - countries specialize in the production of those commodities in
which they hold absolute or comparative advantage
 FT improves efficiency of resource allocation
 Customers access to a wider choices of products and services available - updated styles,
international trends
 Foreign exchange gains
 FT is an engine of economic growth
 Generate revenues
 Create jobs
Cons:
 Unfair trade
 Dumping
 Domestic industries may be harmed
 Resources may be excessively exploited
 Environment problems
Essay:
Free trade, the unrestricted exchange of goods and services between nations, has become a
cornerstone of the global economy. In this essay, the advantages and disadvantages of free trade will
be discussed.

One significant advantage of free trade is its role in boosting production. Through specialization
based on absolute or comparative advantage, countries can maximize their output, leading to
increased productivity and economic growth. Additionally, free trade enhances the efficiency of
resource allocation by allowing resources to flow to their most productive uses, thereby promoting
economic efficiency. Consumers also reap the rewards, gaining access to a wider variety of products
and services at potentially lower prices due to increased competition. Furthermore, free trade acts as
an engine for economic growth, generating foreign exchange, creating jobs, and boosting government
revenue.

However, critics of free trade highlight several disadvantages. Unfair trade practices, such as
dumping, can harm domestic industries by flooding the market with cheap imported goods. This can
lead to job losses and the decline of domestic industries, particularly in sectors where countries lack a
comparative advantage. Furthermore, free trade may exacerbate the overexploitation of resources and
environmental degradation as countries prioritize economic gains over sustainability.

In conclusion, free trade presents a complex picture. While it offers undeniable economic benefits, it
is crucial to address concerns regarding unfair trade practices and environmental impact. Therefore,
policymakers must carefully consider both the merits and demerits of free trade when formulating
trade policies to ensure a balance between economic growth and social welfare.

2. What are the advantages of international trade? (to businesses)

Government
 Better allocation and utilization of natural resources
 Create more jobs
 Economies of scale
 Maintain sufficient supplies
 Diversify product ranges
 Foster peace, harmony, and understanding among nations. Economic interdependence
among countries leads to close cultural relations, thus avoiding wars.
Consumers/ Customers
 Lower prices offered
 More job opportunities
Businesses
 Access new markets, new materials which open up new production possibilities.
 Gains a global market share and reduce dependence on existing markets
 Deal with new trading partners
 Promote sales and profitability
 Encourage innovation by facilitating exchange of know-how, technology and investment in
research and development
 Extend customer base of the existing products
 Maintain cost competitiveness in your domestic market
 Obtain raw materials from abroad
Essay 2.1
International trade, the exchange of goods and services across borders, serves as a cornerstone of
global prosperity. Its advantages reach far beyond simple transactions, impacting governments,
businesses, and consumers alike.

For governments, international trade fosters a more efficient allocation of resources. Countries can
specialize in goods they can produce most effectively, leading to a better use of natural reserves and
increased economic output. This translates to job creation, as industries catering to export markets
expand. Additionally, international trade allows economies of scale, where larger production volumes
result in lower costs for consumers and businesses. Beyond economic benefits, international trade
fosters peaceful relations between nations. As countries become economically interdependent, they
develop a vested interest in maintaining positive relations. This fosters cultural exchange and
understanding, reducing the likelihood of conflict.
Consumers are the ultimate beneficiaries of international trade. Increased competition in the global
marketplace drives down prices, offering a wider variety of goods at more affordable costs. This
wider range of choices allows for a more diverse and fulfilling consumer experience.

Businesses too, reap significant benefits. International trade grants them access to new markets,
opening doors to larger customer bases and increased profitability. Exposure to new materials and
technologies can lead to innovative product development, further propelling businesses forward.
Additionally, international trade fosters collaboration and knowledge exchange, leading to
advancements in research and development. By accessing resources not readily available
domestically, businesses can maintain cost competitiveness and expand their product offerings.

In conclusion, international trade serves as a powerful engine of economic progress. It allows

governments to optimize resources, creates jobs, and fosters innovation. Consumers benefit from
lower prices and greater choice, while businesses gain access to new markets and technologies.
Ultimately, international trade promotes peace and understanding, weaving nations together in a
global tapestry of shared prosperity.

Essay 2.2

The global marketplace presents a wealth of opportunities for businesses that embrace international
trade. This exchange of goods and services across borders transcends simple transactions, offering a
multitude of advantages that can propel businesses towards growth and prosperity.

One key benefit is access to new markets, significantly expanding a company's customer base. This
translates to increased sales potential and diversification of revenue streams, reducing dependence on
a single market. Additionally, international trade exposes businesses to new materials and
technologies, potentially sparking innovative product development and giving them a competitive
edge.

Furthermore, international trade fosters collaboration with new trading partners. This exchange of
knowledge and expertise can lead to advancements in research and development, propelling
businesses further ahead of the curve. By extending their customer base to new regions, businesses
leverage economies of scale, allowing them to produce goods at a lower cost while maintaining
competitiveness in their domestic market.

The ability to obtain raw materials from abroad is another significant advantage. This allows
businesses to secure resources that may be scarce or expensive domestically, further optimizing
production costs. Ultimately, international trade acts as a catalyst for business growth, promoting
sales, profitability, and innovation.

In conclusion, international trade presents a compelling proposition for businesses of all sizes. By
venturing beyond domestic borders, companies unlock a world of possibilities, from accessing new
markets and resources to fostering collaboration and innovation. This global engagement serves as a
powerful driver of economic growth and prosperity for businesses in today's interconnected world.
 Unit 2
I. GAP-FILLING
1. The purchase of physical assets or a significant amount of ownership of a company in
another country to gain a degree of management control is called FDI.
2. PI is an investment that does not involve obtaining a degree of control in a company.
3. The international product life cycle theory states that a company will begin by
exporting its product and later undertake foreign investment as a product moves through its
life cycle.
4. The eclectic theory states that firms undertake foreign direct investment when the
features of a particular location combine with ownership and internalization advantage to
make a location appealing for investment.
5. The advantage of locating a particular economic activity in a specific location because of
the characteristics of that location is called a location advantage.
6. An internalizing advantage is the advantage that arises from internalizing a business
activity rather than leaving it to a relatively inefficient market.
7. The extension of company activities into stages of production that provide a firm's inputs
or absorb its output is called vertical integration.
8. The market power theory states that a firm tries to establish a dominant market presence
in an industry by undertaking foreign direct investment.
9. The benefit of market power is greater profit because the firm is far better able to dictate
the cost of its inputs and /or the price of its outputs.
10. The greenfield investment refers to building a subsidiary abroad from the ground up.
11. A system of production in which each of a product's components is produced in that
location in which the cost of producing the component is lowest is called rationalized
production.
12. A country's BOP is a national account that records all payments to entities in other
countries and all receipts coming into the nation.
13. The current account is a national account that records transactions involving the import
and export of goods and services, income receipts on assets abroad, and income payments
on foreign assets inside the country.
14. When a country imports more goods, services, and income than it exports, it is called a
current account deficit.
15. A current account surplus occurs when a country exports more goods, services, and
income than it imports.
16. The capital account is a national account that records transactions that involve the
purchase or sale of assets.
17. Performance demands influence how international companies operate in host nations.
18. Ownership restrictions prohibit non-domestic companies from investing in certain
industries or owning certain types of businesses.
1. A cash grant is called an investment incentive whose purpose is to attract
investment/promote FDI.
2. Most companies give foreign companies tax incentives to attract new investment.
3. What kind of ROI can I expect on my investment?
II. Q&A
1. What are the differences between FDI and FPI?
 Foreign direct investment (FDI): Purchase of physical assets or a significant amount of the
ownership (stock) of a company in another country to gain a measure of management
contrwol. Portfolio investment (Pl): Investment that does not involve obtaining a degree of
control in a company.
2. What are some financial considerations in making a foreign direct investment?
 Exchange rates
 Rate of returns on investment
 Production Costs
 Investment incentives
 Interest Rates
 Cash flow
 Sources of working capital
 Tax rates
3. What are the important management issues in the FDI decision?
 Control: controlling activities occurring in the local market
 Purchase-or-Build Decision: purchase an existing business or build an international
subsidiary from the ground up
 Production Costs: the firm's costs of production: Labor regulations
 Customer Knowledge: gain valuable knowledge about the behavior of buyers that it
could not obtain from the home market.
 Following Clients: putting them close to firms for which they act as supplier
 Following Rivals: Companies engage in FDI simply because a rival does
4. For what reason do host countries intervene in FDI?
 To protect their Balance of Payment: a nation also gets a balance-of-payments boost
from an initial FDI inflow
 Obtain Resources and Benefits:
Access in Technology: Local investment in technology also tends to increase the productivity
and competitiveness of the nation.
Management skills: By encouraging FDI, nations can also bring in people with management
skills who can train locals and thus improve the competitiveness of local companies.
Employment: Many local jobs are also created as a result of Incoming FDI.
5. For what reasons do home counties intervene in FDI?
 Investing in other nations sends resources out of the home country - lowering the
balance of payments
 Outgoing FDI may ultimately damage a nation's balance of payments by taking the
place of its exports.
 Jobs resulting from outgoing investment may replace jobs at home that were based
on exports to the host country
6. What are the main methods host countries use to restrict and promote FDI?
Restriction:
Ownership restrictions: Governments can impose ownership restrictions that prohibit
nondomestic companies from investing in businesses in cultural industries and those
vital to national security.
Performance demands: Performance demands can take the form of stipulations
regarding the portion of the product's content originating locally, the portion of output
 that must be exported, or requirements that certain technologies be transferred to local
businesses.
Promotion:
Financial incentives: Host governments can also grant companies tax incentives such
as lower tax rates or offer to waive taxes on local profits for a period of time.
A country may also offer low-interest loans to investors
Infrastructure improvements:
Some governments prefer to lure investment by making local infrastructure
improvements
- better seaports suitable for containerized shipping, improved roads, and increased
telecommunications systems.
7. What methods do home countries use to intervene in FDI?
Home countries: Restriction
- Differential tax rates: Impose differential tax rates that charge income from earnings
abroad at a higher rate than domestic carmings
- Outright sanctions: Impose outright sanctions that prohibit domestic firms from
making investments in certain nations
Home countries: Promotion
- Offer Insurance to cover the risks of investments abroad.
- Grant loans to firms wishing to increase their investments abroad.
A home-country government way also guarantees the loans that a company takes from
financial institutions.
- Offer tax breaks on profits earned abroad or negotiate special tax treaties.
- Apply political pressure on other nations to get them to relax their restrictions on
inbound investment.
III. ESSAY-WRITING
1. What are the advantages and disadvantages of FDI in VN?
Ads:
 Raise national output
 Enhance the standard of living for their people
 New jobs are created
 Generale tax revenues
 External capital is bumped into the economy
 The host country obtains high technology, new and advanced business practices,
global management styles, now economic concepts
Disads:
 May affect ecosystem and environment
 Local resources are vulnerable to exploitation by foreign firms
 BOP any decrease when direct investors return profits made locally back to their
home country
 FDI flows can overheat the economy
Essay:
Foreign Direct Investment (FDI) has become a significant driver of economic growth in
Vietnam. However, its impact is multifaceted, offering both advantages and disadvantages that
require careful consideration.
On the positive side, FDI acts as a catalyst for raising national output. By establishing
production facilities and employing local workers, foreign companies boost Vietnam's overall
economic production. This translates to increased tax revenue for the government, which can
be used to improve infrastructure and social services, ultimately enhancing the standard of
living for Vietnamese citizens. Additionally, FDI creates new jobs, reducing unemployment
and fostering a more skilled workforce. Furthermore, Vietnam benefits from the transfer of
knowledge and expertise that accompanies FDI. Foreign companies often bring with them
advanced technologies, innovative business practices, and modern management styles. This
exposure to new ways of working can significantly propel Vietnam's own economic
development.

However, FDI also carries potential drawbacks. One major concern is the potential
environmental impact. The pursuit of economic growth can lead to unsustainable practices that
harm the ecosystem. Furthermore, local resources may be particularly vulnerable to
overexploitation by foreign firms focused on maximizing profits. Another potential
disadvantage lies in the impact on the Balance of Payments (BOP). While FDI initially brings
in external capital, profits earned by foreign companies may eventually be repatriated back to
their home countries. This outflow of funds could potentially weaken Vietnam's BOP.
Additionally, an overreliance on FDI can overheat the economy, leading to inflation and asset
bubbles.

In conclusion, FDI presents Vietnam with a complex situation. While it offers significant
economic benefits like increased output, job creation, and knowledge transfer, environmental
concerns and potential BOP issues require careful management. By establishing a regulatory
framework that balances economic growth with environmental protection, Vietnam can harness
the power of FDI for sustainable development.
 Unit 3
I. GAP-FILLING
1. The market in which currencies are bought and sold and in which currency prices
are determined is called the foreign exchange market.
2. The practice of insuring against potential losses that result from adverse changes in
exchange rates is called currency hedging.
3. Currency arbitrage is the instantaneous purchase and sale of a currency in
different markets for profit.
4. Currency speculation is the purchase or sale of a currency with the expectation
that its value will change and generate a profit.
5. In a quoted exchange rate, the currency with which another currency is to be
purchased is called the quoted currency.
6. In a quoted exchange rate, the currency that is to be purchased with another
currency is called the base currency.
7. The exchange rate requiring delivery of the traded currency within two business
days is called the spot rate.
8. The exchange rate at which two parties agree to exchange currencies on a specified
future date is called the forward rate.
9. Forward contract is a contract requiring the exchange of an agreed-upon amount
of a currency on an agreed-upon date at a specific exchange rate.
10. A currency swap is the simultaneous purchase and sale of foreign exchange for
two different dates.
11. Currency that trades freely in the foreign exchange market, with its price
determined by the forces of supply and demand is called a convertible currency /
hard currency.
12. Exchange of goods and services between two parties without the use of money is
called counter trade / barter.
13. An international monetary system in which nations linked the value of their paper
currencies to specific values of gold was called the gold standards.
14. A system in which the exchange rate for converting one currency into another is
fixed by international agreement is called a fixed exchange rate system.
15. The Bretton Woods Agreement was an accord among nations to create a new
international monetary system based on the value of the U.S. dollar.
16. The agency created by the Bretton Woods Agreement to provide funding for
national economic development efforts is called the World Bank.
17. IMF was the agency created by the Bretton Woods Agreement to regulate fixed
exchange rates and enforce the rules of the international monetary system.
18. An exchange-rate system in which currencies float against one another with
governments intervening to stabilize currencies at a particular target exchange rate
is known as a managed float system.
19. Free Float System is an exchange - rate system in which currencies float freely
against one another, without governments intervening in currency markets.
1. Foreign Exchange Market is a market in which currencies are bought and sold and
in which currency prices are determined.
 2. Dealers using two foreign exchange markets to benefit from rate differentials are said
to engage in arbitrage.
3. Speculators buy currencies when they expect their value to increase.
4. Increasing currency speculation is making exchange rates more volatile.
5. Hedging is the attempt to reduce risks; speculating is the opposite.
6. The Bretton Woods Agreement stipulated that all members would express their
currencies in USD.
7. Gold Standard is an international monetary system in which nations link the value of
their paper currencies to a specific amount of gold.
8. Bretton Woods Agreement was an accord among nations to create a new
international monetary system based on the value of the dollar.
9. Hedging is the attempt to reduce risks; speculating is the opposite.
10. Bartering is based on the exchange of goods for goods.
11. When central banks intervene in the foreign exchange markets at the intervention
points, this is called the system of fixed exchange rates. The opposite is called the
system of floating exchange rates.
12. Central bank of the member countries were required to intervene in the foreign
exchange markets to keep the value of their currencies within 1 percent of the par
value.
13. A forward transaction means that delivery of a currency is specified to take place at
a future date.
14. Arbitrage is the practice of transferring funds from one currency to another to
benefit from rate differentials.
15. Another verb for fixing exchange rates against something else is to peg them.
16. A currency can appreciate if lots of speculators buy it.
17. In fact we have managed floating exchange rates, because governments and central
banks sometimes intervene on currency markets.
18. Commodities are raw materials such as agriculture products and metals that are
traded on special exchanges.
19. If you hedge, you make transactions that are designed to reduce risks regarding a
particular price, interest rate or exchange rate.
20. A speculator anticipates future changes in a market and makes risky transactions,
hoping to make a gain.
21. The foreign exchange market is the mechanism through which foreign currencies
are traded.
II. Q&A
1. What is the foreign exchange market?
The foreign exchange market is the market in which currencies are bought and sold
and in which currency prices are determined.
The foreign exchange market is the mechanism through which foreign currencies
are traded. It is not an actual market place but a system of telephone or telex
communications between banks, customers and middlemen (foreign exchange
brokers, acting for a client vis-à-vis the bank). It is an extremely valuable
mechanism for world trade. Its main function is to reduce the risk of fluctuating
exchange rates or of a change in the parity of currencies (devaluation or revaluation)
2. For what four reasons do investors use the foreign exchange market?
 First, individuals, companies, and governments use it, directly or indirectly, to
convert one currency into another. Second, it offers tools with which investors can
insure against adverse changes in exchange rates. Third, it is used to earn a profit
from arbitrage - the purchase and sale of a currency, or other interest-paying
security, in different markets. Finally, it is used to speculate about a change in the
value of a currency.
3. Distinguish between spot rate and forward rate. How is each used in the
foreign exchange market?
A spot rate is an exchange rate that requires delivery of the traded currency within
two business days. This rate is normally obtainable only by large banks and foreign
exchange brokers. The forward rate is the rate at which two parties agree to
exchange currencies on a specified future date. Forward exchange rates represent
the market's expectation of what the value of a currency will be at some point in the
future.
4. Describe the three main institutions in the foreign exchange market?
The world's largest banks exchange currencies in the interbank market. These banks
locate and exchange currencies for companies and sometimes provide additional
services.
Securities exchanges are physical locations at which currency futures and options
are bought and sold (in smaller amounts than those traded in the interbank market).
The over-the-counter (OTC) market is an exchange that exists as a global computer
network linking traders to one another.
5. Why are restrictions placed on currency conversion: What policies can
governments use to restrict currency conversion?
There are four main goals of currency restriction.
First, a government may be attempting to preserve the country's hard currency
reserves for repaying debts owed to other nations.
Second, convertibility might be restricted to preserve hard currency to pay for
needed imports or to finance a trade deficit.
Third, restrictions might be used to protect a currency from speculators.
Finally, such restrictions can be an attempt to keep badly needed currency from
being invested abroad.
Policies used to enforce currency restrictions include government approval for
currency exchange, imposed import licenses, a system of multiple exchange rates,
and imposed quantity restrictions.
III. ESSAY
1. What are ways of making money on the foreign trade market?
Arbitrage: The transfer of funds from one currency to another to benefit from
currency differentials or disparities in interest rates. In arbitraging, at least two
markets are entered.
Speculation: When dealers do not offset a "buy" contract with a "sell" contract. This
means that their position is left open.
Hedging: To offset a "buy" contract with a "sell" contract and vice versa, matching
the amounts and the time span exactly.
Essay:
The foreign exchange (forex) market, a vast and dynamic arena, offers numerous
avenues for generating profit. However, navigating this complex landscape requires a
thorough understanding of the available strategies. Three key approaches dominate the
forex market: arbitrage, speculation, and hedging.

Arbitrage exploits discrepancies between different markets. By simultaneously buying

a currency in one market at a lower price and selling it in another at a higher price,
traders can capitalize on temporary price differentials. This strategy demands swift
action and meticulous monitoring of currency fluctuations to identify profitable
opportunities.

Speculation, on the other hand, involves taking calculated risks based on predictions of
future currency movements. Traders buy or sell currencies based on their belief that
the value will rise or fall, respectively. While potentially lucrative, speculation carries a
significant risk of loss. Accurate economic analysis, a keen understanding of market
sentiment, and a healthy dose of caution are crucial for success.

Hedging, in contrast, aims to manage risk rather than generate direct profits. By
entering into opposing positions in the same currency pair, traders can mitigate
potential losses in their underlying investments. For example, a company importing
goods may purchase a futures contract to guarantee a fixed exchange rate, protecting
themselves against unfavorable fluctuations.

Ultimately, the choice of strategy depends on an individual's risk tolerance and

financial goals. Arbitrage offers the potential for low-risk profit, but requires constant
vigilance. Speculation can be highly rewarding, but carries significant risk. Hedging,
while not directly generating income, provides valuable protection against market
volatility.

In conclusion, the forex market presents a variety of options for those seeking to profit
from currency fluctuations. Whether through capitalizing on market inefficiencies,
making calculated bets on future movements, or mitigating risk, the key to success lies
in understanding and applying the appropriate strategy.