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Fin165 Final

Terms in this set (35)

10 or 20%
% of company sold during IPO
operational risk
same as systematic risk
impatient capitalism
sometimes destructive, short-term focus on the part of both management and investors
investment horizon
how long it takes the firm's actions, its investments and operations, to result in earnings
shareholder wealth maximization, agency theory, long-term vs short-term
SWM assumptions
Stakeholder capitalism model, market efficiency, risk, single vs multiple goals, the scorecard
SCM assumptions
max income, min tax burden, position income, CF, funds with country and currency
3 goals of MNE
stocks with significant family influence, management long-term, good between manage and sharehold, focus on core business
SSFI components
IPOs, movements from one exchange to another, spinouts, new listings from small non-exchanges
listing additions
forced, mergers, acuiqisitions
delistings
equity market
external forces
board, managers
internal forces
financial market development, degree of separation between manage and owner, concept of disclosure and transparency, historical development of legal system
exchange rate regimes function of 4 factors
lower cost of capital, higher returns to shareholders, high corporate profitability
4 things good corporate governance linked to
CEOs and CFOs vouch for fin statements, corporate boards have audit/compensation committees, no loans to corporate officers, companies test internal controls
4 provisions of SOX
measures changes in value of outstanding financial obligations incurred prior to a change in exchange rates but not due to be settled until after the exchange rates change, changes in cash flows that result from existing contractual obligations
transaction exposure
potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements of foreign subsidiaries into a single reporting currency to prepare worldwide consolidated financial statements
translation exposure
measures change in the present value of the firm resulting from any change in future operating cash flows of the firm caused by an expected change in exchange rates: also economic exposure, competitive exposure, strategic exposure
operating exposure
the variance in expected cash flows arising from unexpected changes in exchange rates
currency risk
improves planning capability, more accurate predictions of CF, reduces likelihood of CF falling below level sufficient to make debt service payments, gives management comparative advantage over individual shareholder by knowing actually currency risk, management is in better position to recognize disequilibrium conditions and take advantage of opportunities to enhance firm value through selective hedging
5 pros hedging
minimum CF level at which company can satisfy its debt service payments required for continued operation
point of financial distress
hedging only exceptional exposures or the occasional use of hedging when management has a definite expectation of the direction of exchange rates
selective hedging
shareholders are more capable of diversifying currency risk than management, currency hedging doesn't increased expected CF, currency risk management consumes firm resources and reduces CF, agency problems with management benefitting management not shareholders, managers can't outguess market, managers might reduce variability for accounting reasons, EMH believes foreign exchange effect is already factored into firm's market valuation
7 cons hedging
trading on open account when prices are in foreign currencies, borrowing or lending funds when repayment is in foreign currency, being party to unperformed foreign exchange forward contract, acquiring assets or incurring liabilities denominated in foreign currencies
4 transaction exposure arises
transaction exposure created at the first moment the seller quotes a price in foreign currency terms to a potential buyer
quotation exposure
potential exposure created at the time of the quotation is converted into actual exposure because the product has not yet been shipped or billed
backlog exposure
exposure created when goods are shipped and billed, persisting until payment is received by the seller
billing exposure
offsetting operating cash flow a payable arising from the conduct of business
natural hedge
involves a forward or futures contract and a source of funds to fulfill that contract
forward hedge
involves a loan agreement and a source of funds to fulfill that contract: balance sheet hedge; money is borrowed in one currency and proceeds are exchanged in another
money market hedge
involves the purchasing of a put option that allows for the speculation on the upside potential for appreciation of currency while limiting downside risk to a known amount
option hedge
combination of management's philosophy toward transaction exposure and the specific goals of treasury activities
risk tolerance
minimizing the change in the value of the exposed asset or CF from a change in exchange rates
currency hedging
accomplished by combining the exposed asset with a hedge asset to create a two-asset portfolio in which the two assets react in relatively equal but opposite directions to an exchange rate change
hedging
B: the percentage of an individual exposure's nominal amount covered by a financial instrument such as a forward contract or currency option
hedge ratio
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