F9 Chapters 11-15

Question 1

What is corporate governance?

Answer 1

The system by which companies are directed and controlled.

Question 2

What are the 5 main principles of Corporate Governance, common to all?

Answer 2

• Separation of the supervisory and management functions
• Transparency on recruitment and remuneration to board
• Appointment of NEDs
• Establish audit committee and remuneration committee
• Establishment of risk control procedures

Question 3

What is a security?

Answer 3

A medium of investment

Question 4

What are Eurobonds

Answer 4

Bonds denominated in a currency other than that of the currency of the issuing company.

Question 5

What are the 3 types of money market instruments?

Answer 5

• Coupon bearing securities
• Discount securities
• Derivatives

Question 6

What is the role of the treasury department?

Answer 6

• Short-term management of cash/currency
• Long term maximisation of shareholder wealth
• Risk management

Question 7

What are the 3 types of foreign currency risk?

Answer 7

• Transaction risk: gain or loss on conversion
• Economic risk: long term version of transaction
• Translation risk: retranslated performance of subsidary is distorted

Question 8

Bid and offer prices?

Answer 8

• Bank sells low (Hello)
• Bank buys high (Bye Bye)

Question 9

What is the Purchasing Power Parity Theory?

Answer 9

‘The law of one price’

In equilibrium - identical goods must cost the same, regardless of currency they are sold in.

Uses inflation as basis.

Question 10

PPPT formula?

Answer 10

Given, however:

S₀ = Currency spot

h_b = Inflation rate in local (base) currency

h_c = Inflation rate in other (counter) currency

Question 11

What is the Interest Rate Parity Theory?

Answer 11

Claims that the difference between spot and forward FX rates is equal to the differential between interest rates.

Question 12

What is the formula for IRPT?

Answer 12

Given, however:

S₀ = Spot rate.

Keep consitent with fraction i.e. £/$ and £/$