Chapter 7 - Financial Risk

Question 1

Financial Risk

Answer 1

Where financial conditions are different to those expected

Question 2

Managing credit risk

Answer 2

• Credit control
• Non-recourse debt factoring
• Insurance

Question 3

Causes of exchange rate fluctuations

Answer 3

• Balance of payments - difference between overseas earning/spending
  
  • surplus, doing well, higher currency
• Purcahsing power parity (PPP) - equivalnet amount money in different currencies buy same thing
  
  • higher inflation, weaker currency
• Interest parity theory (IRP) - real rate of interest same in all countries
• Politcial stablity
• Country’s debt rating
• Govn monetary policy

Question 4

Internal hedging techniques

Answer 4

• Invoice in home currency
• Trade on cash terms - no credit period
• Foreign bank account
• Matching receipts/payments
• Counter trading - payment in goods
• Leading and lagging - pay early / later
  
  • replaces with credit risk
  • early/late settlent fees
• Multilateral netting - net off what owed between multinational group

Question 5

FX Hedging (defn)

Answer 5

Reduce/mitigate downside financial risk