FIN 435 - Final
Terms in this set (56)
When a country's currency depreciates against the currencies of major trading partners, the country's exports...
When a country's currency depreciates against the currencies of major trading partners, the country's imports...
The capital account measures...
the difference between US sales of assets to foreigners and US purchases of foreign assets
International reserve assets include "foreign exchanges," which are...
foreign currency held by a country's central bank
The US trade deficit...
is both a capital account surplus and current account deficit
The forward market...
involves contracting today for the future purchase of sale of foreign exchange at a price agreed upon today
Under the Bretton Woods system...
the US dollar was the only currency that was fully convertible to gold
US exports $3 trillion. US impots $3.1 trillion. The US would have a...
Trade deficit of $100 billion
With regard to the current exchange rate arrangement between the US and Germany, it is best characterized as...
Market determined floating
The capital account includes...
all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses
In 2012, Great Britain had a current account deficit, which implies...
they consumed more output than produced
In general, the price of a call ____ and the price of a put ___ as the underlying asset price becomes less volatile.
In general, the party that writes an option...
has unlimited risk
In general, the party that buys an option...
has limited risk
1 year dollar interest rate is 3%, 1 year euro interest rate is 2%. We would expect...
Euro to appreciate, dollar to depreciate
If IRP fails to hold...
1) pressure from arbitrageurs should bring exchange rates and interest rates back into line
2) it may fail to hold due to transaction costs
3) it may be due to government-imposed capital controls
The quote for a 5-year swap with annual payments 8.50-8.60 percent. This means swap bank will receive
annual fixed-rate dollar payments of 8.60 percent against paying 1-year dollar LIBOR
You owe 10 million pounds in 1 year. You could hedge this by...
Buying pound futures AND buying calls on the pound
You will receive 10 million pounds in 1 year. You could hedge this by...
Buying puts on the pound
The quote for a 5-year swap with annual payments 8.50-8.60 percent. This means swap bank will pay...
annual fixed-rate dollar payments of 8.50 perfect against receiving 1-year dollar LIBOR
Translation exposure refers to the effect that an unanticipated change in exchange rates will have on the...
consolidated financial reports of a MNC
A firm has $10 million in assets and $8 million in liabilities. One way to hedge this translation exposure would be to...
Borrow $2 million
Buying a currency option provides...
1) a flexible hedge against exchange exposure
2) limits the downside risk while preserving the upside potential
3) a right, but not obligation, to buy or sell a currency
To hedge a currency payable...
buy call options on the foreign currency
When cross-hedging, it is necessary to find one asset that...
covaries with another asset in some predictable way
An exporter faced with exposure to an appreciating currency can reduce transaction exposure with a strategy of...
A US-based MNC with exposure to the Thai bhat would likely cross-hedge with...
forward contracts on the Japanese yen
Suppose the dollar depreciates against the euro, then...
The stronger euro would help American companies competing with European imports in the US AND the weaker dollar would help American companies who were exporting to Europe
A firm with highly inelastic demand for its products...
will be able to raise prices following unfavorable changes in the exchange rate without significantly lowering the quantity sold
Two Factors of Cost
Business/Asset Risk AND Financing/Leverage Risk
Home bias is...
amount invested domestically vs. internationally relative to the size of the
The company can expand its potential
investor base, which will lead to a higher stock price and lower cost of capital, thanks to...
Cross-border listings of stocks
Cross-listing creates a secondary market for the company's shares, which...
facilitates raising new capital in foreign markets
Cross-listing can enhance...
the liquidity of the company's stock
Potential costs of cross-border listings
1) Costly to meet disclosure and listing requirements
2) Once a stock is traded in overseas markets,volatility spillover is possible
Same securities are priced differently for different investors, most notably in overseas markets
Payback Period - advantages
1) Easy to calculate & understand
2) An indicator of project risk
Payback Period - disadvantages
1) Ignores time value - easy to fix
2) Ignore cash flows that occur after the payback period
Two techniques used to measure a project's stand-alone risk
Sensitivity analysis & Scenario analysis
Sensitivity analysis shows...
how changes in an input variable (such as utilization) affect profitability
Scenario analysis examines...
several possible profitability outcomes (worst case, most likely, and best case)
Sensitivity graph, steeper lines show...
Advantages of Sensitivity Analysis...
1) Identifies the most critical variables
2) Provides some basic breakeven information
Disadvantages of Sensitivity Analysis...
1) Doesn't consider interaction between input variables
2) Provides no quantitative measure of risk
Advantages of Scenario Analysis...
1) Considers more than one variable at a time
2) Provides information about worst case results
3) Provides a quantitative measure of stand-alone risk
Disadvantages of Scenario Analysis...
1) Only considers a limited number of outcomes
2) Forces all the best and worst case input values to occur together
Four types of real options
Timing, Growth, Suspension, Abandonment
an option on when to make the investment
an option to increase the scale of the investment
an option to temporarily cease production
an option to quit the investment early
Types of Translation Methods
Current/Noncurrent, Monetary/Nonmonetary. Temporal, Current Rate
Current assets are translated at the spot rate, noncurrent assets are translated at the historical rate (when item was first recorded on the books)
All monetary balance sheet accounts of a foreign subsidiary are translated at the CURRENT EXCHANGE RISK
Balance sheet account are translated at the current spot exchange rate if they are carried on the books at current value (if carried at historical costs, then historical exchange rate)
Current Rate Method
All balance sheet items (except for stockholder's equity) are translated at the current exchange rate