BEC 6 - Topic 4, 5,6,7 Flashcards
What are risk preferences?
Risk indifferent behavior - highest return period
Risk Averse Behavior - increase in risk results in increase in returns.
Risk seeking behavior - increase in level of risk results in decrease in returns.
What is Diversifiable risk?
Non-market, unsystematic or firm specific.
What is Nondiversifiable risk
Market or systematic risk. Impacts everyone.
What are various types of risks?
Interest rate risk Market risk Credit risk Default risk Liquidity risk
What are foreign exchange risks?
Transaction, translation and economic
What are techniques to mitigate exchange rate risk by transaction exposure?
Future hedges Forward hedge Money market hedge Factoring Currency option hedges Currency swaps Parallel Loan
What are alternative hedging techniques?
Leading and lagging
Cross-hedging
Currency Diversification
What is transfer pricing?
They serve the purpose of minimization of local taxation while remaining within the guidelines of foreign or other host governments.
When do translation risk occur?
When a company has foreign subsidiary or investment.
What does short term financing used for?
Used for temporary working capital that require agility and flexibility.
What are advantages & disadvantages of short term financing?
Advantages:
Increased liquidity
Increased Profitability
Decreased Financing cost
Disadvantages:
Increased interest rate risk
Decreased Capital availability
What are advantages & disadvantages of long term financing?
Advantages:
Decreased Interest rate risk
Increased capital availability
Disadvantages:
Decreased profitability
Decreased liquidity
Increased financing costs
What is a debenture?
Debenture represents an unsecured obligation. The holder of debenture has the status of a general creditor.
What are junk bonds used for?
Raise capital for acquisitions and leveraged buyouts.
What are debt covenants?
To protect the actions of debtors that might negatively affect the positions of the creditors.
