Chapter 20 - Financial Management and Accounting in the Global Firm

Question 1

Equity Financing

Answer 1

Issuing shares to raise capital from investors and the use of retained earnings

Question 2

Debt Financing

Answer 2

Borrowing money from banks or other financial intermediaries, or selling corporate bonds to individuals or institutions in order to raise capital

Question 3

Global Money Market

Answer 3

The collective financial markets where firms and governments raise short-term financing

Question 4

Global Capital Market

Answer 4

The collective financial markets where firms and governments raise intermediate-term and long-term financing

Question 5

Global Equity Market

Answer 5

The worldwide market of funds for equity financing - the stock exchanges throughout the world where investors and firms meet to buy and sell shares

Question 6

Eurodollars

Answer 6

US dollars held in banks outside the United States, including foreign branches of US banks

Question 7

Eurocurrency

Answer 7

Any currency deposited in a bank outside its country of origin

Question 8

Bond

Answer 8

A debt instrument that enables the issuer to raise capital by promising to repay the principal along with the interest on a specified date

Question 9

Global Bond Market

Answer 9

The international marketplace in which bonds are bought and sold, primarily through banks and stockbrokers

Question 10

Foreign Bond

Answer 10

A bond sold outside the issuer’s country and denominated in the currency of the country in which it is issued

Question 11

Eurobond

Answer 11

A bond sold outside the issuer’s home country but denominated in its own currency

Question 12

Intra-Corporate Financing

Answer 12

Funds provided from sources inside the firm (both the headquarters and subsidiaries) such as equity, loans and trade credits

Question 13

Fronting Loan

Answer 13

A loan between the parent and its subsidiary, channelled through a large bank or other financial intermediary

Question 14

Multilateral Netting

Answer 14

The strategic reduction of cash transfers within the multinational enterprise family through the elimination of offsetting cash flows

Question 15

Transaction Exposure

Answer 15

The currency risk that firms face when outstanding accounts receivable or payable are denominated in foreign currencies

Question 16

Translation Exposure

Answer 16

The currency risk that results when a firm translates financial statements denominated in a foreign currency into the functional currency of the parent firm, as part of consolidating international financial results

Question 17

Consolidation

Answer 17

The process of combining and integrating the financial results of foreign subsidiaries into the financial statements of the parent firm

Question 18

Economic Exposure

Answer 18

The currency risk that results from exchange rate fluctuations affecting the pricing of products, the cost of inputs and the value of foreign investments

Question 19

Spot Rate

Answer 19

The exchange rate applicable to the trading of foreign currencies in which the current rate of exchange is used and delivery is considered immediate

Question 20

Forward Rate

Answer 20

The exchange rate applicable to the collection or delivery of a foreign currency at some future date

Question 21

Direct Quote

Answer 21

The number of units of the domestic currency needed to acquire one unit of the foreign currency

Question 22

Indirect Quote

Answer 22

The number of units of the foreign currency obtained for one unit of domestic currency

Question 23

Hedgers

Answer 23

Currency traders who seek to minimise the risk of exchange rate fluctuations, often by buying forwards or similar financial instruments

Question 24

Speculators

Answer 24

Currency traders who seek profits by investing in currencies with the expectation that they will rise in value in the future

Question 25

Arbitragers

Answer 25

Currency traders who buy and sell the same currency in two or more foreign exchange markets to take advantage of differences in the currency’s exchange rate

Question 26

Hedging

Answer 26

Using financial instruments and other measures to reduce or eliminate exposure to currency risk

Question 27

Forward Contract

Answer 27

A financial instrument to buy or sell a currency at an exchange rate that is agreed at the initiation of the contract, for delivery and settlement in the future

Question 28

Futures Contract

Answer 28

An agreement to buy or sell a currency in exchange for another at a pre-specified price and on a pre-specified date

Question 29

Currency Option

Answer 29

A contract that gives the purchaser the right, but not the obligation, to buy a certain amount of foreign currency at a set exchange rate within a specified amount of time

Question 30

Currency Swap

Answer 30

An agreement to exchange one currency for another, according to a specified schedule

Question 31

Transparency

Answer 31

The degree to which companies regularly reveal substantial information about their financial condition and accounting practices

Question 32

Current Rate Method

Answer 32

The translation of foreign currency balance sheet and income statements at the current exchange rate - the spot exchange rate that is in effect on the day or for the period for which the statements are prepared

Question 33

Temporal Method

Answer 33

The translation of foreign currency balance sheet and income statements at an exchange rate that varies with the underlying method of valuation

Question 34

Tax Haven

Answer 34

A country that is hospitable to business and inward investment because of its low corporate income taxes