Final Exam

Question 1

what is financial risk management?

Answer 1

is the process of protecting shareholders value from risk exposures of the firm.

• variability of cash flows affects predictability
• borrowing costs and FX rates can disrupt cash flows
• therefore affects liquidity

Question 2

counterparty risk

Answer 2

risk that the counterparty to FWD contract may default on their obligations at maturity

Question 3

spot rate

Answer 3

FX rate in the current time

Question 4

Factors influencing changes in FX rates

Answer 4

1) country with high IR level compared to another country experiences excess demand for its currency
2) country with higher inflation rate witness devaluation in currency

Question 5

margin call

Answer 5

difference between daily value of the maintenance margin and margin market account value

Question 6

currency cap

Answer 6

the call option that gives the holder the right to buy the currency at a fixed exercise price.
max ceiling on the price paid by the holder of the currency

Question 7

currency floor

Answer 7

purchasing a put option on a currency= right to sell a currency at a fixed exercise price to hedge receivables denominated in foreign currency

Question 8

short term borrowing

Answer 8

financing short term capital liabilities which are notes payable on the balance sheet

Question 9

letter of credit

Answer 9

agreement between firm and a bank that stipulates the bank will make a loan for a specific dollar amount over a defined period of time if specific conditions are met

Question 10

MMsec

Answer 10

matures 1 year or less

-used by firms with higher credit ratings to raise ST financing

Question 11

Commercial paper

Answer 11

ST promissory note issued at a discount from FV