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FM > Overseas Trade > Flashcards

Overseas Trade Flashcards

1
Q

What’s a pro and a con with invoicing in home currency?

A

+Transfers risk to the other party.

-May not be commercial acceptable.

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2
Q

What is “Transaction Risk”?

A

The risk that the FX rate will change between the date of contract and the date of settlement.

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3
Q

What is “Economic Risk”?

A

The risk that the the value of the business will be affected by long run changes in exchange rates.

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4
Q

What “Translation Risk”?

A

The risk that reported performance will be affected by exchange rate movements.

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5
Q

What are 4 ways you can manage transaction risk?

A
  • Invoice in sterling.
  • Leading and lagging.
  • Matching.
  • Foreign currency bank accounts.
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6
Q

Will banks sell the base currency high or low?

A

Low.

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7
Q

Will banks buy the base currency high or low?

A

High.

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8
Q

Is the base currency USD or GBP for 1.4325 - 1.4330?

A

GBP

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9
Q

Is the variable currency USD or GBP for 1.4325 - 1.4330?

A

USD

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10
Q

Explain “Leading”.

A

If an exporter expects that the currency it is due to receive will depreciate over the next few months it may try to obtain payment immediately (could offer a discount).

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11
Q

Explain “Lagging”.

A

If an importer expects that the currency it is due to pay will depreciate over the next few months it may try to delay payment (could exceed credit terms).

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12
Q

Is “Leading and Lagging” a form of hedging?

A

No, it is speculation.

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13
Q

Explain “Matching”.

A

When a company has receipts and payments int same foreign currency it can simply match them against each other and then deal with only the unmatched part.

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14
Q

Explain how having a foreign currency bank account works?

A

When a firm has regular receipts and payments in the same currency it may choose to operate a foreign currency bank account. This acts as a permanent matching process and limits exposure to the net balance on the account.

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15
Q

What are forward rates?

A

A discount or a premium on the spot rate.

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16
Q

What do you do with a discounted forward rate?

A

Add. Get more $ per £.

17
Q

What do you do with a forward rate at a premium?

A

Subtract. Get less $ per £.

18
Q

How do you hedge a payment? (Money Market Hedge)

A

Buy the PV of foreign currency amount today at the spot rate. Place it on deposit to accrue interest until the transaction date and then use it to make the FX payment.

19
Q

How do you hedge a receipt?(Money market)

A

Borrow the present value of the foreign currency amount today then sell it at spot for GBP. Results in immediate and certain receipt of the GBP which can be invested. The loan accrues interest until the transaction date. The loan is repaid in full with the foreign currency receipt.

20
Q

Forward Rate/Expected future rate=

A

Average Spot Rate x (1+Average OS interest/inflation rate)/(1+Average UK interest/inflation rate)

21
Q

What are the 4 main risks that increase when trading overseas?

A
  • Physical risk.
  • Trade Risk.
  • Liquidity risk.
  • Credit risk.
22
Q

What is a physical risk?

A

The risk of goods being lost in transit.

23
Q

What is trade risk?

A

The risk of an order being cancelled/delivery refused.

24
Q

What is liquidity risk?

A

The inability to finance a longer operating cycle.

25
Q

What is credit risk?

A

Increased bad debts.

26
Q

What are 4 ways you can reduce credit risk?

A
  • Using bills of exchange.
  • Documentary credit.
  • Export factoring.
  • Export insurance.
27
Q

What are the 4 steps to deal with any futures question?

A

1) Decide whether to buy or sell.
2) Decide what expiry date to pick.
3) Calculate the number of contracts.
4) Show the calculation (two elements)

28
Q

What are the 5 steps to deal with any traded options question?

A

1) Decide whether to buy a call or a put.
2) Decide what expiry date to pick (the next date AFTER you expect to act)
3) Calculate the number of contracts.
4) Decide what strike price to choose.
5) Show the calculation (three elements).

29
Q

How do you calculate the average spot rate for estimating the discount/premium on a currency?

A

Add both current spot rates then divide by 2.

30
Q

How do you calculate the average OS interest rate for estimating the discount/premium on a currency?

A

Add both current OS interest rates then divide by 2.

31
Q

How do you calculate the average UK interest rate for estimating the discount/premium on a currency?

A

Add both current UK interest rates then divide by 2.

32
Q

How do you calculate the estimated premium?

A

Average calculated forward rate - Average current spot rate.

33
Q

What should you always remember when calculating the expected future rate?

A

Pro-rate the average interest rates used. e.g. if you’re calculating the expected rate in 4 months you need to 4/12 the annual interest rates.

34
Q

5 ways you can mitigate economic exposure. (no hedging)

A
  1. Diversify operations world-wide both for purchasing raw materials and selling its products.
  2. Market and promotional management; the company must carefully decide in which markets to operate.
  3. Product management; economic exposure may mean high-risk product decisions.
  4. Pricing strategy must respond to the risk of fluctuations in exchange rates.
  5. Production management; economic exposure may influence the supply and location of production.
35
Q

What 4 things should be considered

when considering investing overseas?

A 
CAMP
Cultural risk - difference in
behaviors
Advantages we already have - Do
we have experience in that market?
Market attractiveness - GDP and
forecast demand in that region
Political risk - import quotas/tariffs,
legal restrictions, restriction on
foreign ownership, protectionism

FM (10 decks)

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