Chapter 01 - Financial Risk Management Flashcards
Risk Averse
These managers expect to be compensated for increased risk.
Risk Seeking
an investor certainty equivalent is greater than the expected value of an investment alternative.
Risk is classified into 2 categories
Diversifiable
- unsystematic
Nondiversifiable
-systematic
appreciation of currency
when one currency appreciates , other currency is losing buying prower.
When income rises
consumer in that country purchase more domestic and foreign goods.
demand increases for foreign currency, its price increases, and the local currency depreciates.
shift the demand curve to the right
us dollar declines
reduces prices of the US goods to foreigners and should increase exports
foreign goods will be priced higher and imports from foreign countries will decrease
as the supply of currency increase
its value will decrease
increase in demand of us products will increase
the demand of US dollars
what is the effect when a foreign competitor currency becomes weaker compared to the US dollar
the foreign company will have an advantage
Option worth exercising
intrinsic value is positive.
a call option gives the holder the right to purchase
exercise price - underlying asset
put option
the right to SELL and option at a given price within a certain period
call option
the right to BUY an option at given price within a certain period
buy currency in a future at specified price
out of the money
the market price is less than the exercise price
futures contracts
price is market to market each day
minimized the chance to default P/L on contracts must be received each day through clearing house
forward contract
executory contract in which the parties involved agree to the terms of the purchase an a sale but performance is deferred
forward contract involves commitment today to purchase in future at a price today
