fire 316 fall 2014 midterm 1 review outline

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  • 8/10/2019 FIRE 316 Fall 2014 Midterm 1 Review Outline

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    FIRE 416 Midterm 1

    Review Outline

    1. Explain the importance of international business activit to lar!ecorporations. "hat are the tpes of opportunities sou!ht baspirin! multinational companies# "hat are the ris$s faced bthese companies which are speci%c to the international nature oftheir business activities#They seek shareholder wealth maximization,investment opportunities, enhancing revenues (through global branding,market fexibility, advantages o scale and scope) and reducing operatingcosts (through low-cost raw materials, low-cost labor, fexibility in globalsite selection, fexibility in sourcing and production, economies o scaleand scope, and economies o vertical integration) !isks develop out o

    di"erences in legal, accounting, and tax systems, di"erences in personnelmanagement, di"erences in marketing, di"erence in distribution,di"erence in #nancial markets, and di"erence in corporate governance!isks include political (risk that the business environment in a hostcountry will unexpectedly change due to political events), #nancial (risk ounexpected change in the #nancial or economic environment o a hostcountry), and currency$oreign exchange risk (risk o unexpected changesin currency values a"ect the value o the #rm)

    &. 'iven the followin! Euro to ( Exchan!e rate of 1.46) what is theinformation contained in this *uote# If the +urchasin! +ower+arit ,heor is correct) what is true about the relationship

    between the - dollar and the Euro at this exchan!e rate# %tmeans that or every & euro, you would receive '& *+ This meansthat the uro is currently stronger than the *+ .ccording to the/urchasing /ower /arity Theory, these two values should be able topurchase identical amounts o products 0 ie, a product that costs '& inthe *nited +tates should only cost & uro in urope

    /. 0 - multinational compan is re*uired to report its %nancialresults in - dollars. ow does this create currenc exchan!eris$ for the compan# "hat is the term which most accurateldescribes this particular ris$# 1urrency rates fuctuate 0 while it maybe best to convert other currency to *+, it also may minimize the value

    o the #rm This is translation risk 2hile the currency is not actuallyconverted, it is presented in a singular currency or the purpose o#nancial statements ue to the exchange rate, there is a distortion in the#rm3s value

    4. Identif and describe the was in which a - compan canparticipate in international commerce. They can participate ininternational commerce by purchasing and selling goods between oreign

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    (15 million in the -. "hat are the was that a - ban$ canmana!e the ris$s of lendin! in 3anada. They will be exposed to avariety o currency exchange risks, including risks associated withcurrency conversion and also with fuctuations in the value o the1anadian dollar versus the .merican dollar They could manage the riskthrough a currency swap

    15. Identif and explain at least four factors which a>ect currencexchan!e rates. %nfation, di"erentials in interest rates, politicalstability, and current-account de#cits =ower infation strengthens thatcountry3s currency against other currencies 2ith interest rates, higherrates attract oreign capital which in turn raises the exchange rate/olitical and economic stability attract oreign investors 0 turmoil causesinvestors to lose aith in that country3s currency and seek investmentselsewhere % a country borrows a large amount o money rom othercountries, this will tend to decrease the exchange rate, until products arecheap enough to attract investor interest

    11.

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    are hedging by predicting that values will rise in the uture , but by gettingprices locked in, they will be able to pro#t

    16. e able to explain the di>erences between O,3 and Exchan!e,raded mar$ets. xchange traded markets are much more regulatedand standardized than :T1 traded markets, making them less risky

    1;. e able to write a brief overview of !lobal currenc mar$et

    structure. .ll currencies are able to be converted into other currencies,allowing business to take place between any two countries (theoretically)

    This also provides opportunities or investors1=. e able to discuss a ran!e of arbitra!e issues as the relate to

    currenc mar$ets. This occurs when a stock is priced below its valueThese opportunities are short lived, as the market will correct itsel assoon as the stock is Cumped upon 7ecause o this, it reDuires real-timepricing Duotes and the ability to act extremely Duickly

    19. e able to explain the di>erences between !ross and netcurrenc ris$ exposures for a multinational corporation. Eetexposure is the percentage di"erence between long and short termexposure Fross exposure is long plus short term exposure

    &5. e able to describe the basic characteristics of currenched!in! toolsC forwards) futures) swaps) options and morecomplex options caps) :oors) collars7) as well as ?naturalhed!es@ on a corporationDs balance sheet. They are recorded aseither an asset or a liability, depending what side you are on, or orwards,utures, swaps, and options

    &1.

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    9orward price G spot price H&Ii(t)J

    9K G /KL(&Ir)MnTriangular arbitrage 0 exchange rates don3t match up *!$*+, *!$F7/,*+$F7/