Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

International Financial Management > IFM > Flashcards

IFM Flashcards

1
Q

How do you calculate the percentage change in exchange rate?

A

(Spot rate now - spot rate yesterday)/Spot Rate Yesterday) x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What factors influence exchange rates?

A

percentage change in the spot rate
change in the relative inflation rate
change in the relative interest rate
change in the relative income level
change in government controls
change in expectations of future exchange rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What do nominal interest rates include?

A

Element of inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Borrow in weaker or stronger currency?

A

Weaker

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Invest in weaker or stronger currency?

A

Stronger

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the 4 methods of forecasting exchange rates?

A

Technical
Fundamental
Market-based
Mixed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the absolute forecasting error equation to evaluate a models performance to forecast exchange rates?

A

(forecast value – realised value)/(realised value)

Lower percentage more accurate so likely to go with.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is Arbitrage?

A

Arbitrage can be loosely defined as capitalizing on a discrepancy in quoted prices to make a riskless profit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the 3 types of arbitrage?

A

locational arbitrage
triangular arbitrage
covered interest arbitrage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is locational arbitrage?

A

Locational arbitrage is possible when a bank’s selling price (ask price) is lower than another bank’s buying price (bid price) for the same currency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is triangular arbitrage?

A

When the direct route and route via another currency differ, e.g. with £100 buying $s via MYR £100 x 8.10 x 0.2 = $162 the direct rate is £100 x 1.6 = $160 there is a potential triangular (riskless) arbitrage profit…

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is covered interest arbitrage?

A

Covered interest arbitrage is the process of capitalizing on the interest rate differential between two countries while covering for exchange rate risk.
Covered interest arbitrage forces a relationship between forward rate premiums and interest rate differentials.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is IRP?

A

As a result of market forces, the forward rate differs from the spot rate by an amount that sufficiently offsets the interest rate differential between two currencies.
Then, covered interest arbitrage is no longer feasible and the equilibrium state achieved is referred to as interest rate parity (IRP).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

When does IRP HOLD?

A

When covered interest arbitrage is not possible or worthwhile

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the 3 types of exchange rate fluctuation exposure?

A

transaction exposure
economic exposure
translation exposure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is transaction exposure?

A

The degree to which the value of future cash transactions can be affected by exchange rate fluctuations is referred to as transaction exposure.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How do you measure transaction exposure?

A

estimate the net cash inflows or outflows in each currency
measure the potential impact of the exposure to those currencies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

How do you measure economic exposure?

A

Economic exposure can be measured by assessing the sensitivity of the firm’s earnings to exchange rates.
This involves reviewing how the earnings forecast in the firm’s income statement changes in response to alternative exchange rate scenarios

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is economic exposure?

A

Economic exposure refers to the degree to which a firm’s present value of future cash flows can be influenced by exchange rate fluctuations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is translation exposure?

A

The exposure of an MNC’s consolidated financial statements to exchange rate fluctuations is known as translation exposure.
Subsidiary earnings translated into the reporting currency on the consolidated income statement are subject to changing exchange rates.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

How do you calculate forward premium?

A

F = S (1 + p )

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is the forward premium / discount of:
S = £0.60:$1, 90-day F = £0.59:$1

A

annualized p = F – S  360
S n
= 0.59 – 0.60  360 = –.017% a 1.7% discount
0.60 90

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is a non-deliverable forward contract (NDF)?

A

An NDF represents an agreement regarding a position in a specified amount of a specified currency, a specified exchange rate, and a specified future settlement date.
An NDF does not result in an actual exchange of the currencies at the future date. One party to the agreement makes a payment to the other party based on the exchange rate at the future date.
It is really no more than a contract that is closed out at maturity date.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What are currency futures?

A

Currency futures contracts specify a standard volume of a specific currency to be exchanged on a specific settlement date at a specified exchange rate.
As well as currencies the price agreement may be for a range of underlying assets, ranging from beef to copper.
Currency futures are used by MNCs to hedge their currency positions and by speculators who hope to capitalize on their expectations of exchange rate movements.

25
Q

What is a futures carrying cost?

A

In general terms, this is the cost of carrying out the transaction now and storing (carrying over) the underlying asset until the maturity date.

26
Q

How to calculate carrying cost?

A

Currency carry cost: Borrow now, convert and invest the present value of standardized amount. The carry cost is the interest paid on the borrowing less the interest earned. Other underlying assets will have seasonal price variations as well.

27
Q

What are currency futures daily settlements?

A

Buyer pays seller if futures price goes down – receives if futures price goes up
Suitable for protection against price rises
Seller pays buyer if futures price goes up and receives if futures price goes down
Suitable for protection against price falls

28
Q

Futures: If price goes from 18 pence to 20 pence seller …

A

pays buyer “compensation” of 2 pence

29
Q

Futures: If price goes from 18 pence to 15 pence buyer

A

pays seller “compensation” of 3 pence

30
Q

What are the two types of swaps?

A

FX
Currency

31
Q

What are FX Swaps?

A

Transactions involving the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract … and a reverse exchange of the same two currencies at a date further in the future at a rate (generally different…) … agreed at the time of the contract.

32
Q

What are currency swaps?

A

Contracts which commit two counterparties to exchange streams of interest payments in different currencies for an agreed period of time and/or to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.

33
Q

What are currency options?

A

Currency options are one type of option; the range of underlying assets is similar to futures contracts.
a premium is paid for a period of cover.
when an “accident” occurs, compensation is paid to return the buyer to the agreed maximum or minimum.
If a currency goes above a certain exchange rate a call option will pay the difference, if it doesn’t you just lose your premium.
If a currency goes below as certain exchange rate, a put option will pay the difference, if it doesn’t then you lose your premium.

34
Q

What do currency options provide?

A

Currency options provide the right but not the obligation to purchase or sell currencies at specified strike prices also called exercise prices. They are classified as calls (right to buy a currency) or puts (right to sell a currency).

35
Q

Currency call options are:

A

in the money if a claim can be made.
at the money if currency price = strike price.
out of the money if a claim cannot be made.

36
Q

What is a currency put option?

A

A currency put option is said to be in the money (i.e. profitable) when the present exchange rate is less than the strike price.
Where a put option is at the money, the present exchange rate equals the strike price, and out of the money when the present exchange rate exceeds the strike price.

37
Q

What are conditional options?

A

A currency option may be structured such that the premium is conditioned on the actual currency movement over the period of concern.

38
Q

What are barrier options?

A

A barrier option is cheaper than a plain vanilla option because whether it starts or ends depends upon the price path of the underlying asset.
If the price during the life of the option touches or crosses a barrier the option can either start (knock in) or end (knock out).
These types of barrier options can be categorized further into down-and-out options and up-and-out knock-out options.

39
Q

What is NPV?

A

The NPV model values the basic proposal without any elaboration against a largely unresponsive market environment.

40
Q

What is the real option approach?

A

The real options approach adds possibilities and contingent plans to exploit or avert outcomes creating something of a strategy – that is a course of action for each outcome.

41
Q

What is game theory?

A

The game theory approach considers direct responses to the outcomes of a particular investment.

42
Q

What are the firm specific motives for foreign direct investment?

A

Proprietary technology – the company has a particular set of patents that it seeks to exploit by taking its business abroad.
Managerial/marketing skills – the company makes a profit by taking over other companies and running them using their management and marketing skills. Eventually those companies taken over will be based abroad.
Trademarks – the company seeks to promote its brand in competition with other brands that are international and inevitably an international image is required.
Economies of scale – only by selling on the world market can a profit be made due to large capital requirements

43
Q

What are the Internalization advantages
for foreign direct investment?

A

High enforcement costs – a weak legal structure may mean that a physical presence abroad is required to ensure that the company’s wishes are carried out.
Buyer uncertainty over value – if buyers are uncertain over the value of a product then the company may have to carry out at least the sales and marketing operation in that country by investing directly abroad.
Need to control production – some items such as food and drink are not easily exported and need to be produced in a manner that cannot be easily replicated.

44
Q

What are the country specific advantages
for foreign direct investment?

A

Natural resources – exploitation of natural resources necessarily requires a foreign presence.
Technology – countries may develop expertise in certain production or service industries that can only be exploited by being physically close to such sources.
Labour force – cheap labour may represent a significant cost saving.
Tax – some countries have particularly low tax regimes and can be part of an overall strategy to minimize tax payments.
Trade barriers – to avoid restrictions on exports it may be better to produce in the country concerned. Investment by multinationals in the European Union (EU) is sometimes cited as evidence of the effect of restrictions on international trade.
Physical and cultural ‘distance’.

45
Q

Problems with FDI?

A

The law of comparative advantage assumes that the factors of production (machinery and labour) do not move.
Much FDI however involves relocating assets (machinery).
Labour moves to where there are jobs.
This leaves regions without a leading specialism at a permanent disadvantage.
Ultimately depopulation and a declining economy in those areas. Note: the Baltic States, Bulgaria, Greece, Portugal and Spain.
Debate as to whether recipient nation’s own ability to grow (endogenous growth) is helped or hindered by FDI.

46
Q

Host government view of FDI

A

Each government must weigh the advantages and disadvantages of FDI in its country
The government may provide incentives to encourage desirable forms of FDI and impose preventive barriers or conditions on other forms of FDI. Establishing a research centre is often a requirement, i.e. improving the human capital.
Some governments allow international acquisitions but impose special requirements on the MNCs that desire to acquire a local firm.
Such conditions include environmental constraints, restrictions on local sales and employment requirements.

47
Q

What is the bargaining model?

A

FINANCE…does it raise money locally or borrow from abroad?

TRADE BALANCE… how much does a MNC import or export?

ECONOMIC DEVELOPMENT… investment in local R&D?

COMPETITION…effect on local companies?

ENVIRONMENT…is it here because of low standards? (Equator Principles?)

CULTURE…does it blend in with local culture or compete?

EMPLOYMENT… how much local employment?

TECHNOLOGY...how much sharing? College courses etc?

POLITICS...can a MNC always be neutral?

LAW...is the law implemented?

TAXES... taxation – transfer pricing?
48
Q

What is TTIP (Trans-Atlantic Trade and Investment Partnership)?

A

Failed initiative to promote trade and investment. There has been no formal withdrawal but little attempt to further negotiations since 2017.
Principle of ISDS (investor state dispute settlement) similar to MAI. Also included is the harmonization of food production to US standards.
The argument of MAI and TTIP is that it means greater wealth. The counter argument is that the greater inequality of wealth in society means that not all will gain and some areas may suffer; also that there are social and environmental implications that are being affected without any effective democratic control.
One of the dividing issues of TTIP was the concern of the EU over GM food and meat from cattle raised with growth hormones

49
Q

What is double taxation?

A

Double taxation agreement is an agreement where they have to pay the higher tax.
If the project has a lower tax they pay the tax then in the head company pay the difference in tax rates

50
Q

Questions will always assume double taxation?

A

Yes
Three potential scenarios:
Home country tax rate (say 20%) is LOWER than foreign tax rate (say 30%) = Pay 30% tax in foreign country.
Home country tax rate (say 20%) is THE SAME AS foreign tax rate (also 20%) = Pay 20% tax in foreign country only.
Home country tax rate (say 20%) is HIGHER than foreign tax rate (say 15%) = Pay 15% tax in foreign country AND an additional 5% in home country.

51
Q

Assume inter-company cash flows are tax allowable in the foreign country?

A

Yes

52
Q

If the inter-company cash flow is tax allowable in the foreign country, there will be a corresponding tax liability on the income in the home country?

A

Yes

53
Q

What are remittance restrictions?

A

Foreign governments sometimes place a limit on the profits that can be repatriated. This limit may change the extra tax payable by the parent company.

For example, if a company expects to generate pre-tax profits of $5 million each year from a foreign investment project, but the foreign government only allows 50% of the profits to be repatriated, the additional tax payable in the home country should be calculated based on remitted profits of $2.5 million per year.

54
Q

What is long-term financing?

A

Sources of equity and debt include:
domestic offering in local currency
global offering in multiple currencies
private placement to home country financial institutions
private placement to host country financial institutions
Many MNCs obtain equity funding in their home country and engage in debt financing in foreign countries

55
Q

What are the 3 major types of financing?

A

Retained Earnings
Equity - Shares
Debt - Loans, Bonds

56
Q

What is pecking order theory?

A

Pecking order theory (1984) suggests that companies have a preferred order in which they seek to raise finance.

57
Q

What is debt finance?

A

Debt is usually viewed as low risk because:
it often has a definite maturity and the holder has priority in interest payments and on liquidation
income is fixed, so the holder receives the same interest whatever the earnings of the company.
Debt holders do not usually have voting rights. Only if interest is not paid will holders take control of the company.
Bank Loans
Bonds
Debentures
Loan Notes

58
Q

What are the bond terms?

A

Par or Face Value
Coupon Rate
Coupon Payments
Maturity Date
Original Maturity

59
Q

What is equity finance?

A

Finance raised by the issue of shares to investors
Equity holders (shareholders) receive their returns asdividends
paid at the discretion of the directors
returns potentially quite volatile and uncertain
shareholders generally demand high rates of return to compensate them for this high risk.

International Financial Management (1 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions