Business 1 - Corporate Governance & Financial Risk Management

Question 1

Highly Leveraged Client implies (blank).

Answer 1

Client is heavily utilizing debt in the capital structure.

Question 2

Debts means borrowing. If prime interest rates (blank 1) (the rates that banks charge their most creditworthy customers), debt becomes (blank 2) which then leads to (blank 3) interest costs that have a significant impact on the bottom line.

Answer 2

1. Rise
2. More Expensive
3. Higher

Question 3

Domestic Currency Appreciating

Answer 3

When domestic currency appreciates in relation to the foreign currency, the domestic currency will become more expensive. Our exports will increase to purchase overseas which will lead to a decline in outflows. Our imports will decrease which will lead to an increase in inflows.

Question 4

Cross Rate

Answer 4

The exchange rate between two currencies derived by using two exchange rate quotes that have a common currency.

Question 5

Foreign Currency (inflow/outflow)

Answer 5

1. Foreign Currency with Depreciation and Domestic Currency with Appreciation equals a NET INFLOW LOSS and NET OUTFLOW GAIN in Foreign Currency.
2. Foreign Currency with Appreciation and Domestic Currency with Depreciation equals a NET INFLOW GAIN and NET OUTFLOW LOSS in Foreign Currency.

Question 6

Parallel Loans

Answer 6

Represent a swap contract for hedging LT transaction exposure and are not specifically designed to mitigate the risk of over-hedging.

Question 7

Acquisition of the Maximum # of Hedge Contracts

Answer 7

Know and Projected transactions exposes the organization to greater risk of over-hedging since projected transactions might not materialize.

Question 8

Cross Hedging

Answer 8

Involves techniques related to currencies that do have hedge instruments available to mitigate risk and are not specifically designed to avoid over-hedging.

Question 9

Forward Contract

Answer 9

Derivatives contract in which the price to be received or paid in the future is locked in prior to settlement of the transaction.

Question 10

Credit Risk Premium in relation to Require Rate of Return

Answer 10

The credit risk relates to the ability of a firm to obtain, not grant, credit. Require rate of return adjustments do not include a credit risk adjustment.