Currency

Question 1

What are the three types of Foreign Currency Exchange Risk faced by an entity?

Answer 1

Translation Risk
Transaction Rick
Economic Risk

Question 2

What does denominated mean?

Answer 2

That the transaction is carried out in a foreign currency, not the dollar

Question 3

Transaction Risk

Answer 3

the possible unfavorable impact of changes in currency exchange rates on transactions that are denominated in a foreign currency. The domestic entity will need to either:
convert the foreign currency it receives to dollars,
or convert dollars to foreign currency to pay its liabilities

Question 4

Translation Risk

Answer 4

The possible unfavorable impact of changes in currency exchange rates on FS of foreign operations that are converted from a foreign currency to a domestic currency. Occurs when a domestic entity has foreign operations which prepares its FS in a foreign currency.

Question 5

Put Option

Answer 5

an option that gives its owner the right the sell a specific security at fixed conditions of price and time. a put option is a contract that gives the owner the right, but not the obligation, to sell a specified amount of the underlying asset at a specified price within a specified time.

Question 6

Economic exchange risk

Answer 6

Derives from changes in currency exchange rates that alter the value of future transactions.

Question 7

Forward exchange contracts

Answer 7

agreements to exchange commodities in the future at an exchange rate set at the present.

Question 8

Foreign currency forward exchange

Answer 8

establishes a legal obligation to exchange currencies

Question 9

Hedges

Answer 9

generally involves two transactions for which a loss on one would be offset at least in part by a gain on the other. Hedging the future receipt of a foreign currency would require a contract to sell that foreign currency in the future.

Question 10

What currency will a foreign currency transaction be settled in.

Answer 10

the foreign currency

Question 11

What should one do if they are worried that a foreign transaction occurring in the future might have a different exchange rate when the time comes

Answer 11

Buy pounds in the forward exchange market. (Enter into a futures contract)

Question 12

Transfer pricing

Answer 12

the determination of the amounts at which transactions between affiliated entities will be recorded.

Question 13

What would serve to mitigate risks associated with outsourcing?

Answer 13

include an arbitration clause in the contract with the foreign supplier by providing a predetermined mechanism for resolving differences between the buyer and supplier.

Question 14

What is the US’s share of worldwide GDP? %

Answer 14

25%

Question 15

Franchising

Answer 15

a special form of licensing in which the franchisor sells intangible assets to a franchisee and mandates strict operating requirements of the franchisee. Franchising provides greater quality control than simple liscensing.

Question 16

Foreign direct investment occurs when…

Answer 16

a domestic entity invests in foreign production facilities.

Question 17

The International Monetary Fund addresses which types of economic crises

Answer 17

Currency Crisis
Banking Crisis
Debt Crisis.
The objective is to maintain order in the international monetary system by providing funds to countries in financial crisis.

Question 18

What is the primary purpose of the World Bank

Answer 18

to promote general economic development, especially in developing countries, primarily by leading for infrastructure, agriculture, education and similar needs

Question 19

What are the purposes of the General Agreement on Tariffs and Trade (GATT)?

Answer 19

GATT has as its primary purposes the liberalizing and encouraging international trade by eliminating tariffs, subsidies, import quotas, and other trade barriers, to harmonize intellectual property laws and to reduce transportation costs.