New Day I Flashcards
WHAT does it mean if a call option is “out of the money?”
THIS occurs when the market price is less than the exercise price
WHY? - Because the call owner ordinarily would not exercise the option (i.e. this would result in a loss)
WHAT does the Regression equation DO?
IT is used to find an equation for the linear relationship among variables
e.g. It estimates the dependent variable
HOW does simple regression differ from multiple regression?
Simple Regression uses ONLY one independent variable while Multiple Regression uses more than one independent variable
WHAT is a Swap Agreement?
THIS is an agreement to exchange interest payments based on one interest structure
E.g. floating rate charges on long-term bonds
Their objective is to hedge interest rate risk
WHAT is Translation Exposure?
THE exposure to fluctuations in exchange rates between the date a transaction is entered into; and
- the date the financial statements (which are denominated in another currency) must be reported
WHAT does the “r” in coefficient of Correlation measure?
THE relative relationship between two variables
i.e. The strength of the linear relationship between the dependent and independent variables
WHAT is an appropriate response to transaction exposure in which a debtor’s currency will sell at a forward discount?
Purchasing the creditor debt in the forward market
WHY? - Because a 30-day forward market purchase prevents the debtor domestic currency from depreciating against the foreign creditor currency
WHAT is the RISK Premium?
The difference between the required rate of return on a given risky investment and the riskless investment (with the same expected return)
i.e. The market risk premium is the amount above the risk-free rate that will induce investment in the market
WHAT is an apparent risk when a debtor is obligated to pay a foreign currency at some point in the future?
THE risk that the foreign currency will appreciate in the meantime which would make the debt more expensive for the debtor to pay off
NOTE: Best solution for the debtor is to purchase the creditor’s currency in the forward market to lock in a definite price
WHAT is a major advantage of a zero-balance account system?
IT maximizes the Float involved in cash disbursement
HOW? - Because by not transferring funds until checks are presented, the float on disbursement is maximized
WHAT is a key responsibility of the Chief Audit Executive?
According to the Institute of Internal Auditors’ International Standards for the Professional Practice of Internal Auditing
TO establish a risk-based approach to determine audit priorities
HOW would the government stimulate the economy if they were to use ONLY fiscal policy?
Reduce consumer taxes and increase government spending
WHAT is a key difference between Dividends and Earnings?
Dividends usually exhibit greater stability than Earnings
WHAT is a Money Market Hedge?
WHEN a firm with a receivable in a foreign currency borrows the foreign currency amount, converts it to their domestic currency and then pays off their loan when their receivable is collected
WHAT is a general purpose of “Learning Curves?”
Meaning: WHAT are they used to predict?
THEY are used to predict: Unit Direct Labor Costs
i.e. They reflect the increase rate at which people perform tasks as they gain experience
Thus, they are useful in predicting unit direct labor costs
