Week 4: Global Capital Markets, Oct 3

Question 1

how do businesses manage currency risk

Answer 1

-understanding their exposure to currency changes and making strategic decisions which consider that exposure
-anticipating shifts in currency values
-hedging their exposure
-identify where/how they are exposed
–transaction, translation, and economic exposure
— quantify the exposure
—-make strategic hedging choices

Question 2

ways to hedge exposure to currency risk

Answer 2

-forward contracts
-currency options
-lead or lag strategies
-diversification
-matching debt and income currencies

Question 3

forward contracts

Answer 3

-a contract to buy/sell foreign currency at a fixed price in the future

Question 4

forward exchange rates

Answer 4

exchange rate for a defines forward period

Question 5

forward premium

Answer 5

(forward discount) is the proportion by which a country’s forward exchange rate exceeds (falls below) its spot rate

Question 6

forward contract to purchase currency

Answer 6

-a forward contract to purchase a currency is beneficial if the spot rate at the date of transaction is more expensive that that offered by the contract (spot > forward)

Question 7

forward contract to sell a currency

Answer 7

is valuable if spot < forward

Question 8

call option

Answer 8

the right to buy a specified amount of foreign currency for a specific price any time up to a specified date

-gives you the option to buy, but not the obligation

Question 9

put option

Answer 9

the right to sell a specified amount of foreign currency for a specific price any time up to a specified date

gives you the option to sell, but not the obligation

Question 10

lead strategy **

Question 11

lag strategy ***

Question 12

diversification

Answer 12

-exposure to multiple currencies can act as a hedge
-flexibility in locations can also act as a hedge

Question 13

matching debt and income currencies

Answer 13

hedges risk if payables and receivables are in the same currency

Question 14

capital markets

Answer 14

stock and bond markets

consists of both primary and secondary markets

Question 15

stocks

Answer 15

equities - a form of ownership

businesses can use to raise capital

Question 16

bonds

Answer 16

debt - a loan which must be repaid (to lenders by borrowers)

businesses can use to raise capital

Question 17

global capital markets

Answer 17

-facilitates financing in a variety of currencies
-investors: offers opportunities and diversification
–more investment opportunities
–portfolio diversification
-borrowers: cost and avail of capital
–search for lower cost of capital

Question 18

growth of global capital markets: tech improvement

Answer 18

-processing of large volumes of stock and bond transaction info (eg, real time updates)
-trade info on a number of exchanges can be accessed from anywhere in the world

Question 19

growth of global capital markets: deregulation

Answer 19

-traditionally financial services have been highly regulated
-restriction have rapidly decreased (eg, foreign ownership of domestic assets and domestic capital investment abroad)

Question 20

global capital market risks

Answer 20

-forex risk
-nations more vulnerable to speculative capital flows
–lack of quality info; and regardless of quality, investors react quickly to news events, which may encourage speculation
–capital seeking short term gains
–potential destabilization of economies

Question 21

eurocurrency

Answer 21

a currency banked outside its country of origin
-eg, Japanese currency held in Victoria TD is a euro-yen

Question 22

why eurocurrency

Answer 22

-absence or near absence of research reqs make euro loans and euro deposits attractive
-lower cost of capital

Question 23

global bond market

Answer 23

bonds are important means of financing for global firms
-two types of bonds
–foreign bonds
–eurobonds

Question 24

foreign bonds

Answer 24

bond issued by a resident of country A but sold to residents of country B, denominated in the currency of country B and subjected to country B’s regulations
-eg, British bank sells Japanese yen denominated bonds in Japan (under Japanese regulations)
-has names like Maple, dim sum, panda, masala, samurai

Question 25

eurobonds

Answer 25

bond denominated in currency A but sold outside of country A
-eg, American Airlines borrows $500m USD to finance new aircraft purchases by selling eurobonds denominated in USD to residents of Germany and France

Question 26

why are eurobonds appealing

Answer 26

regulatory costs
-outside the regulatory domain of any single nation
–avoid most domestic regulations
–avoids tight controls often places on foreign bond issues

disclosure costs
-if want to offer USD bonds in Us, must comply with SEC
-if you offer USD bonds in Japan, do not have to comply with SEC

Question 27

global stock (equity) market

Answer 27

-many stocks are listen on multiple exchanges and stock ownership is increasingly international
-why list on foreign market?
–liquidity of foreign markets - lowers the cost of capital (where to IPO? (higher share price))
–satisfy the demand for local ownership
–visibility with local employees, customers, suppliers, and bankers
–stock options in compensation
–facilitate future acquisitions

Question 28

borrowing on the global capital market

Answer 28

-may save money
-lower interest rates, fewer regulations, higher share prices