Global Financial Management

Question 1

Exchange rates

Answer 1

Using hedging and derivatives to minimise exchange rate risk

Question 2

Interest rates

Answer 2

Using interest rate swaps to minimise the impact of rising interest rates

Question 3

Methods of international payment: Payment in advance

Answer 3

Customer (importer) pays for goods in advance and then supplier (exporter) sends the goods

Question 4

Methods of international payment: Letter of credit

Answer 4

Customer’s (importer) pays for goods in advance and then supplier (exporter) sends the goods

Question 5

Methods of international payment: Clean payment

Answer 5

Supplier (exporter) sends the goods and customer (importer) pays once they have been received

Question 6

Methods of International Payment: Bill of exchange

Answer 6

Customer’s (importer) bank pays exporter for the goods once the shipping note has been received

Question 7

Methods of International Payment: Hedging

Answer 7

Natural hedging involves getting all transactions into ONE currency e.g AUD or the foreign currency by setting up/moving overseas

Question 8

Methods of International Payment: Derivatives

Answer 8

Financial instruments bought from investment banks to reduce currency exposure e.g. forward contracts, options, swaps

Question 9

Derivatives (forward contract)

Answer 9

An agreement to buy or sell currency at a fixed exchange rate at a future date (usually 30/90/180 days)

Question 10

Derivatives (Options)

Answer 10

An option to buy or sell foreign currency at a future date (may not exercise the option if the spot rate is more favourable)

Question 11

Derivatives (swap)

Answer 11

An agreement to exchange currency now at the spot rate, plus an agreement to reverse the transaction in the future