global factors - finance

Question 1

as a business enters the global market…

Answer 1

greater risk is placed upon its financial performance.

Question 2

what are exchange rates

Answer 2

the idea that currency fluctuation affects price paid and received for goods/services sold internationally → impacts revenue profitability and production costs

Question 3

if australia depreciates

Answer 3

imports become more expensive, but our exports become cheaper meaning business will be more internationally competitive.

Question 4

if australia appreciates

Answer 4

imports will be cheaper but exports are more expensive, decreasing international competitiveness.

Question 5

interest rates

Answer 5

• Changes in interest rates impact the willingness & ability of businesses
• Australian businesses often tempted to borrow funds from overseas as interest rates are lower, however there is the risk of adverse currency fluctuations & rising interest rates.

Question 6

what are the four types of methods of international payment

Answer 6

• payment in advance
• letter of credit
• clean payment
• bill of exchange

Question 7

what is payment in advance (international payment method)

Answer 7

payment sent by buyer before goods are sent

Question 8

what are letters of credit (international payment method)

Answer 8

contract which gurantees the importer’s bank will pay the exporter once bank receives documentation proving the shipping of the product

Question 9

what is clean payments (international payment method)

Answer 9

payment is sent to, but not received yet until goods are transported
- requires trust and propsective customers

Question 10

what is bills of exhange (international payment method)

Answer 10

doc instructing importer to pay for the goods at a specified time.

• international banks act as intermediary in transactions, ensuring exporter paid and improter receives goods

Question 11

what is hedging

Answer 11

how global businesses overcome the issue of exchange rate variations (currency fluctuations)

• Businesses may enter into a contract (derivatives) or use natural hedging which are strategies to minimize risk of foreign exchange exposure

Question 12

what is natural hedging and what r the 4 strats

Answer 12

strategies adopted by a business to minimise the risk of foreign exchange exposure

1. offshore subsidiries - opening a branch in a foreign country removing the need for exchanging currencies
2. businesses can establish import and export contracts in the Australian dollar
   customers have to pay in the exporter’s currency, transferring any risk to the buyer

3* Marketing strategies that encourage international consumers to buy their products to reduce price sensitivity

Question 13

what r derivatives

Answer 13

Financial instruments used to support a business’s hedging activities. It is a contract dealing in
the future price of an asset.
* Reduces the risk of future exchange rate fluctuations

Question 14

what r the three main types of derivatives

Answer 14

-forward exchange contracts
-option contracts
-swap contracts

Question 15

what are forward exchange contracts

Answer 15

bank locks in a certain exchange rate on a certain date, regardless of what the actual exchange rate is. Disadvantage is that favourable currency fluctuations cannot be taken advantage of.

Question 16

what r option contracts

Answer 16

right but not obligation to buy or sell at a set exchange rate at a time in the future. Business can choose not to use this if the currency fluctuation is favourable

Question 17

what r swap contracts

Answer 17

allows two businesses to gain a loan in their currency and exchange it with another country business and pay off the other businesses loan
- reverse the transaction at that spot rate despite currency movement.
- when a business/businesses r in need of the other country’s currency and odnt know many lenders (higher interest rates)