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CIMA: BA1 > 4: International Trade & Globalisation, Financial Markets & Institutions, Financial Context of Business > Flashcards

4: International Trade & Globalisation, Financial Markets & Institutions, Financial Context of Business Flashcards

1
Q

What is the balance of payments? & 3 parts?

A

A statement of the value of transactions with other countries. (Double Entry)

Current account, Capital Account & Financial Account

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2
Q

What falls under the Current Account?

A

Trade in goods, services, investment income, money transfers.

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3
Q

What falls under the Capital Account?

A

Government loans to/from other countries.

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4
Q

What falls under the financial account?

A

Foreign direct investment, portfolio investment and flows of currency.

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5
Q

If imports > Exports what does this mean?

A

Current Account Deficit

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6
Q

What causes current account deficits? (Import side)

A

Increased import penetration:
Lower production costs abroad mean cheaper overseas goods.

High exchange rates makes imports cheaper than domestic goods.

Inflationary gaps increase demand for imports.

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7
Q

What causes current account deficits? (Export side)

A

Poor export performance:

Exports are not competitively prices so demand from foreign consumers will fall.

High exchange rates make exports more expensive.

Low economic growth in foreign countries reduces demand for exports.

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8
Q

What are the policies to eliminate current account deficits?

A

Devalue currency, protectionism & deflating domestic demand.

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9
Q

What is an exchange rate determined by?

A

Demand / Supply of the currency on a foreign exchange market.

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10
Q

What creates demand for a currency? & Impact of price fall?

A

Sale of exports and investments into the local economy by foreign investors.

A lower price of a currency will increase demand for the currency.

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11
Q

What creates supply for a currency? & Impact of price rise?

A

Supply is created by the purchase of imported goods, sale of exports and also by foreign investments made by local investors.

The supply for a currency will rise as it’s price rises.

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12
Q

How do interest rates influence exchange rates?

A

Lower interest rates lead to a reduction in demand from foreign investors. So, a reduction in interest rates will lead to a fall in exchange rates.

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13
Q

How does inflation impact exchange rates?

A

High inflation means products become more expensive (Less Competitive)

High inflation would be expected to lead to a fall in demand for exports.

A fall in demand for exports will lead to a fall in demand for currency and a fall for demand in exchange rates.

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14
Q

What is a free floating vs Fixed exchange rate?

A

Free floating: Exchange rate determined by market forces. This will be volatile and may cause reluctance to trade internationally.

Managed Float: Where a government will buy and sell currency to stabilise swings in exchange rate.

Fixed exchange rate: Government needs to buy and sell currency reserves. Creates more certainty and therefore encourages international trade. Far more intensive to manage.

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15
Q

What are the advantages of free trade?

A

Specialisation: in most productive activities (Climate/Natural Resources)

Product Range: Countries can obtain goods they cannot produce themselves.

Greater global efficiency: Driven through increased competition.

Economies of scale: larger markets for a firm’s output.

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16
Q

What are the disadvantages of free trade?

A

Dumping: Imported products sold below domestic production costs.

Infant industries: New domestic firms need time before they are able to compete with larger foreign rivals.

Structural unemployment: Important domestic firms driven out by foreign rivals.

Social responsibility: Low-cost producers neglecting social factors of production.

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17
Q

What are examples of protectionist measures?

A

Outright ban on imports.

Tariffs: Imported goods more expensive.

Subsidies to domestic producers.

Quotas: Restrictions on volumes of a product

These all conflict with principles of free trade

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18
Q

What is a free trade area?

A

No restrictions on supply of goods/services between member countries.

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19
Q

What is a customs union?

A

A free trade area + common external tariffs on imports from non-member countries.

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20
Q

What is a common/single market?

A

A customs union + free movement of factors of production and standardised market regulations.

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21
Q

What is an economic union?

A

Common/single market + common central bank, common interest rate & single currency. (Eurozone)

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22
Q

Aims of the WTO?

A

Reduce barriers to free trade

Eliminate discrimination in trade

Deter protectionist measures.

23
Q

Aims of the World Bank?

A

Lends to developing countries to fund projects and policies that promote economic development.

Used to finance infrastructure projects.

24
Q

Aims of IMF?

A

Support the stability of the international monetary system.

Provide loans to countries with balance of payments problems. (Strict conditions attached: Contractionary fiscal stance)

25
Q

What are the drivers of globalisation?

A

Improvement of communications

Reduction in trade barriers

Emergence of Multi National Companies

26
Q

What is the Pestel analysis? And what is it used for?

A

Political: Stability of government.

Economic: Economic growth, interest rates, inflation, exchange rates.

Social: Demographic changes

Technological: IT & Communication infrastructure.

Ecological: Attitudes to pollution and waste, climate change.

Legal: Employment legislation, health & safety legislation.

It is used to analyse potential opportunities or risks in the external environment.

27
Q

What are expenditure reducing policies vs expenditure switching policies?

A

Reducing: deflating domestic economy through contractionary fiscal/monetary policy

Switching: Protectionist measures

28
Q

What is the matching concept?

A

Organisations should try to match the time period of the finance they borrow. (Short term or long term) to the life of the assets they are financing.

29
Q

What is a financial intermediary?

A

An institution (Bank) that channels funds from savers to borrowers.

30
Q

What are the functions of financial intermediary?

A

Maturity transformation: Bridging the gap between savers desire for liquidity & borrowers desire for long term loan finance.
Aggregation of funds: Aggregating lots of small amounts of money into a large loan.
Pooling of losses (Risk spreading):Covering bad debt risks using interest earned from other loans.

31
Q

Examples of financial markets?

A

Primary markets: Allows borrowers to raise new finance (Issuing shares)

Secondary markets: Allows investors to sell existing assets to other investors.

32
Q

What are the sources of short-term finance? From intermediaries and financial markets.

A

Financial Intermediaries:

Overdraft, Revolving credit facility, Short term loans/leases.

Financial Markets:

Bills of exchange, commercial paper, bank bills, treasury bills.

33
Q

What are the sources of long-term finance? From intermediaries and financial markets.

A

Financial Intermediaries:

Long term loans/leases.

Financial Markets:

Shares, Bonds, Eurobonds, Convertible bonds, Gilts.

34
Q

How to calculate the bond yield?

A

Nominal rate / market price of bond.

Eg: £100 bond with 4% nom rate & £95 market price.

Current yield = 4/95 = 4.21%

35
Q

What are the conflicting aims of commercial banks?

A

Profitability: Must make profit for shareholders using interest rates.

Liquidity: Sufficient cash to meet demands from depositors for cash withdrawals.

Security: To be stable and secure to encourage deposits.

36
Q

What is credit creation?

A

Banks lend out most of the money it receives. (Fractional Reserve Banking)

This money is then deposited into another bank and supports a further loan.

This cycle repeats creating extra deposits > Initial deposit.

37
Q

How do we calculate the credit multiplier & Increase in deposits?

A

Credit Multiplier = 1/Reserve ratio.

Increase in deposits = Initial deposit * Credit Multiplier

38
Q

What are the functions of central banks?

A

Sets interest rates, regulates banking sector, banks to commercial banks & governments, manages foreign currency reserves.

39
Q

What is the financial asset risk ranking order?

From Low to High risk >

A

Treasury Bills > Government bonds > Corporate bonds > Shares.

40
Q

What is the impact of central banks on Market Yields?

A

Interest rates: Increase
Rate of return: Increase
Share Price: Decreases

41
Q

How to calculate how much cash to be deposited for money supply to increase by X amount in addition to initial deposit? With given Reserve Ratio…

A

Let X = 300 & Reserve Rate = 20%

Step 1: Calculate Multiplier (1/20%) = 5
Step 2: Factor: 5 * C = 300 + C
Step 3: Divide both sides by 5: C = 60 + 0.2C
Step 4: Move C to one side: 0.8C = 60
Step 5: Solve for C: C= 60/0.8
C=75

42
Q

What is simple vs compound interest?

A

Simple: Interest earned in equal amounts each period which is based on original investment.

Compound: Interest which as it is earned is added to the original investment, which itself earns interest.

43
Q

How to calculate simple & compound interest?

A

Simple: S = X + ( NRX)

Compound: S = X * (1+R)^N

Where: X = Original sum, R = Interest Rate, N = Number of periods, S = Sum invested after n periods.

44
Q

How to calculate Effective Annual Rate?

A

1 + R = (1+R)^N

45
Q

What is discounting?

A

Expressing future cash flows in today’s terms (Time value of money)

46
Q

How to discount?

A

X = S * 1/(1+R)^N

47
Q

What is NPV & how to interpret the results?

A

The sum of all the present values of future cash flows minus any expenditure.

If NPV = Positive: Accept
If NPV = Negative: Reject

48
Q

How to calculate Annuity & Perpetuity?

A

Annuity = Use Annuity factor tables.

Perpetuity = Cash Flow * (1/Cost of Capital)

49
Q

What is IRR? & Compare it to NPV

A

The rate of interest where NPV = 0

IRR shows the % Return, NPV shows actual returns.

Basing off % alone can mean a smaller return to shareholders is chosen just because it had a higher IRR %.

Always better to go with NPV.

50
Q

What are the impacts of higher interest rates on businesses?

A

Higher cost of capital > Future cash flows more heavily discounted > Lower Present values.

Decline in AD as a whole affecting revenue.

Higher exchange rates make exports more expensive to prospective importers from abroad.

51
Q

What are the impacts of higher exchange rates on businesses?

A

Exports become more expensive to foreign countries.
Imports become cheaper.
Translation risks.

52
Q

What are translation risks & how to manage?

A

Movements in exchange rates that affect value of foreign assets/liabilities in domestic currency.

Can manage by matching assets & liabilities in the same currency to offset any changes.

53
Q

What can businesses do to manage impacts of exchange & interest rate changes?

A

Forward contracts: Fixed rates which mitigates risks but are usually not attractive rates.

Futures Contracts: Fixed Rates which mitigate risks but are standard size contracts only & not available more than 1 year ahead.

Options: > Call: Buy at specific rate, > Put: Sell at specific rates.
Can take advantage in attractive rate changes but are usually expensive to purchase.

CIMA: BA1 (6 decks)

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