Brain Drain 1.0 Flashcards
WHAT happens to an investor in foreign currency If risk is purposely undertaken in the foreign currency market?
THE investor in foreign currency becomes a Speculator
WHY? - Because Speculators buy and sell foreign currencies in anticipation of favorable changes in rates
HOW may a scatterplot graph look If the coefficient of correlation between two variables is zero?
RANDOM POINTS
i.e., there is no relationship between the variables, and the points will be randomly distributed
HOW could a country protect itself against extreme variations in the exchange rates with a foreign country they have significant sales in?
They can reduce sales to that country
i.e. if cash inflows from a country with a volatile currency exceed cash outflows best strategy would be to decrease sales
WHAT is a tool Only available to large entities with established banking relationships when addressing transaction exposure to currency?
Forward Contracts
WHY? - Because Large corporations that have close relationships with major banks are able to enter into contracts for individual hedging transactions concerning large amounts
WHAT is the coefficient of determination, r squared, in a multiple regression equation?
IT is the percentage of variation in the dependent variable explained by the variation in the independent variables
i.e. It is the proportion of the total variation in one dependent variable that is accounted for by two or more independent variables
WHAT does it mean if a market analyst estimates a equity beta for a company to be 1.4?
This means that the Systematic Risk is higher than that of the market portfolio
WHY? - Because an average-risk stock has a beta of 1.0, its returns are perfectly positively correlated with those on the market portfolio
WHAT does the coefficient of determination measure in a regression analysis?
IT measures “Goodness of Fit”
i.e. A measure of the fit between the independent and dependent variables
WHAT does it mean if a company has a beta value of 1.0?
IT means that their expected return should approximate the overall market
i.e. the price of that stock tends to move in the same direction and to the same degree as the overall market
Multiple Regression Analysis involves the use of how many Dependent Variables? Independent Variables?
One - Dependent Variable
More than One- Independent Variables
WHAT is an indication of a very weak linear association between two variables?
A correlation coefficient that is nearest to zero
WHY? Because a coefficient of correlation that is nearest to zero indicates the weakest linear association
WHAT are determinants in valuing a call option?
- Exercise Price
- Expiration Date
- Underlying Asset Price
EQUATION: Exercise price – Underlying asset price) plus the time premium that depends on the expiration date of the option
WHAT does learning curve analysis ultimately reflect in the determination of labor cost standards for a new product?
IT is a cost function showing that the time required for production; and
- therefore the average cost per unit decrease as production rises
WHAT is a derivative instrument?
IT is an investment transaction (financial contract) in which the parties’ gain or loss is derived from some other economic event
i.e. Price of a given stock, a foreign currency exchange rate, or the price of a certain commodity
WHAT is the Beta Coefficient?
A piece of the Capital Asset Pricing Model (CAPM) that measures the firm’s risk
e.g. The beta coefficient of an individual stock is the correlation between the price variation of the stock market and the price of the individual stock
WHAT is the Market risk premium?
THIS is the amount above the risk-free rate that will induce investment in the market
