12.

Question 1

Transactions risk

Answer 1

Arises from import and export g+s. Effects importers and exporters. If dollar decreases in value to Euro, US exporter would gain profits and US importer would lose profits.

Question 2

Translation risk

Answer 2

Associated with short term effects of currency movements on consolidated accounting movements of a firm. Changes in currency over time will affect accounting values.

Question 3

Economic risk

Answer 3

Associated with ways in which long term ER movements affect firms.

Question 4

Hedging

Answer 4

Intends to reduce potential transaction, translation and economic risks of currency movements that could lead to volatile cash flows and losses.

Speculation - opposite of hedging. Attempt to earn profits from trading currencies/currency derivatives.

Question 5

Future contracts

Answer 5

Standardised agreement to buy/sell specified amount of currency on a particular date in future at pre-determined price.

Question 6

Forward contracts

Answer 6

Less standardised, can be customised to meet hedging needs of buyer, and are not marketed to-market daily. Type of future contract.

Question 7

Options contract

Answer 7

Gives investor the right, but not obligation to buy (call option) or sell (put option) a specified amount of currency at future date at pre determined price.

Question 8

Swap contract

Answer 8

Firms can agree to swap currencies at future at previously agreed ER.

Question 9

International banking

Answer 9

Payment methods with different risk: payment in advance is safest method, commercial letter of credit offers payment protection to both parties, open account is simple agreement where exporter sends invoice with goods and importer pays upon receipt.

Question 10

International bond market

Answer 10

Domestic - debt contracts sold by firms dominated in a country in home currency.

Foreign - issued by foreign firm in another country in home currency of that country.

Eurobond - sold in any country outside home country but in home country’s currency.

Question 11

International stock market

Answer 11

Enable firms to issue new equity and raise long term capital, possibility for stock to drop, diversifying can help manage this risk.

Question 12

Gov financing

Answer 12

Government having financial institutions to help in GEC / GFC

Question 13

Income statement

Answer 13

Amount of income firm earned in a period. Summarised revenues earned and expenses incurred.

Question 14

Balance sheet

Answer 14

Balances of asset, liability, owner equity accounts of a business on a specific date.

Shows financial position.

Question 15

Retained earnings

Answer 15

Starting balance of retained earnings, additions and reductions to RE, ending balance of RE.

Question 16

Cash flow

Answer 16

Company’s cash receipts and payments. Inflows and outflows of cash.

Question 17

Management accounting

Answer 17

Kinds of financial analysis. Provide all financial information internally needed by management for business decision-making

Question 18

Financial accounting

Answer 18

Provides financial info to various external users concerned with financial activities of organisation.

External users: require/expect info, and/or receive info on needs basis.

Question 19

GAAP

Answer 19

Generally accepted accounting principles.

Different among countries due to political and legal systems, sources of capital, inflation, culture, etc.

International standards more principles based, US GAAP model more rules based -result of extreme business complexity.

Question 20

Financial ratio

Answer 20

Shows relationship of one number on a financial statement to another number.

E.g. current ratio- current assets/current liabilities. Shows firms abilities to pay current liabilities with current assets.