IFM Exam questions Flashcards
What is the principle behind the Absolute Purchasing Power Parity (PPP) theory?
The Absolute PPP theory suggests that the exchange rate between two currencies should be equal to the ratio of the price levels of the two countries. This is measured by the prices of a basket of goods in each country.
How is the Relative Purchasing Power Parity (PPP) different from the Absolute PPP?
The Relative PPP is focused on the changes in price levels over time rather than the absolute price levels. It states that the rate of change in the exchange rate between two currencies over time should be equal to the difference in the inflation rates of the two countries.
What are some of the factors that might cause the Purchasing Power Parity (PPP) to not hold true in practice?
Factors such as differences in consumption patterns, non-tradable goods and services, trade barriers, transportation costs, and taxes can cause PPP to not hold true in practice.
What is the significance of the variables q and s in the context of PPP?
In the context of PPP, q represents the logarithm of Q, where Q is the ratio of the exchange rate to the price ratio. Similarly, s represents the logarithm of S, where S is the exchange rate.
What is the Black-Scholes model and what are its key components?
The Black-Scholes model, also known as the Black-Scholes-Merton model, is a mathematical model for pricing European-style options on non-dividend-paying stocks. The key components of the Black-Scholes model are the stock price, strike price, time to expiration, volatility, and risk-free interest rate.
What are the main differences between the Garman-Kohlhagen model and the Black-Scholes model?
The Garman-Kohlhagen model is similar to the Black-Scholes model, with the main differences being the separate interest rates for the domestic and foreign currencies and the use of the spot exchange rate instead of the stock price.
What is a swap in finance and what are the most common types of swaps?
Swaps are financial derivative instruments that involve the exchange of cash flows between two parties based on a specified notional amount and a predetermined set of terms. The most common types of swaps are interest rate swaps and currency swaps.
What is the impact of inflation on international financial management?
Inflation impacts the purchasing power of money, which in turn affects the real return on investments. In an international context, differences in inflation rates between countries can lead to changes in exchange rates, which can impact the value of foreign investments.
How does the Garman-Kohlhagen model account for the separate interest rates for the domestic and foreign currencies?
The Garman-Kohlhagen model incorporates separate interest rates for the domestic and foreign currencies into its calculation of the option price. This reflects the fact that the cost of carrying a position in a foreign currency option includes the interest rate differential between the two currencies.
What is a currency swap and how is it used in international financial management?
A currency swap is a financial derivative that involves the exchange of principal and interest in one currency for the same in another currency. In international financial management, currency swaps can be used to manage exposure to exchange rate fluctuations, to obtain lower borrowing costs, and to gain access to foreign capital markets.
What are some of the key macroeconomic indicators that international financial managers should monitor?
International financial managers should monitor a range of macroeconomic indicators, including GDP growth rates, inflation rates, interest rates, unemployment rates, balance of trade figures, and exchange rates. These indicators can provide valuable insights into the economic conditions in different countries, which can inform investment decisions and risk management strategies.
How does the recent US YoY inflation rate of 4.9% impact international financial management?
The US YoY inflation rate can impact international financial management in several ways. For instance, it can affect the value of US dollar-denominated investments, influence the exchange rate of the US dollar against other currencies, and impact the cost of borrowing in US dollars. It can also signal broader trends in the global economy, which can have implications for investment strategies and risk management.
What might be the implications of the forecasted decrease in CA Consumer Prices for international financial managers?
A forecasted decrease in CA Consumer Prices could suggest that inflation in Canada is slowing, which could impact the value of Canadian dollar-denominated investments. It could also influence the exchange rate of the Canadian dollar and affect the cost of borrowing in Canadian dollars. Additionally, it could signal broader trends in the Canadian economy, which could have implications for investment strategies and risk management.
