Week seven - Currencies and the market

Question 1

what is a currency

Answer 1

foreign money in terms of bank notes, cheques, payments etc

Question 2

what is a currency market

Answer 2

a mechanism that operates 24 hours a day and allows buying any currency with another currency

Question 3

what is convertibility

Answer 3

the capacity to exchange a currency for another

Question 4

what is LIBOR

Answer 4

the London interbank basic offered rate, is the interbank interest rate for a currency in a determined period

Question 5

what is EURIBOR

Answer 5

similar to LIBOR, interest rate for the euro

Question 6

what is the exchange rate risk

Answer 6

the risk associated with an increase or decrease of the exchange rate, in the time period between the contract signing and payment, in international trade sales

Question 7

what are some coverage systems for exchange rate risk

Answer 7

• forex hedging (forex insurance)
• currency options
• currency bank account
• currency futures
• price revision clause
• compensation
• swaps

Question 8

what is the change rate insurance

Answer 8

contract between an exporter and financial entity (commercial bank) whereby the exchange rate is fixed for a period of time (forward exchange rate)

Question 9

what are some characteristics of exchange rate insurance

Answer 9

• can be contracted for all or part of the commercial operation
• can be agreed in any moment between the starting date of the contract and the date of payment
• forward quotes are calculated by the banks (calculated using the difference between interest rates of the currencies involved)
• a bank commission or fee is paid

Question 10

what are the two recommended options of advance payment

Answer 10

• negotiate the anticipated cancellation of the insurance
• put the currency in a paid interest deposit for the days leading up to the deadline

Question 11

what is meant by a delayed payment

Answer 11

if the exporter is certain that they will be paid, they can negotiate an extension of the insurance

Question 12

what is non-payment

Answer 12

the exporter will have to buy the currency in the spot currency market and cancel the insurance contract (implies a loss)

Question 13

define ‘option on a foreign currency’

Answer 13

right to buy or sell a foreign currency at a previously established rate on a given date in the future

Question 14

what is strike price

Answer 14

the exporter negotiates and fixes an exchange rate with the bank at which the firm wishes to buy or sell a currency on a given date

Question 15

when is the premium paid on an option on a foreign currency

Answer 15

at the time of purchasing the option, the amount is based on the exchange rate determined

Question 16

what are foreign currency accounts

Answer 16

when a company has to make future payments in a foreign currency, they can buy the foreign currency in the market and deposit those funds in an account until the deadline of the payment

Question 17

what are futures

Answer 17

contracts in which a future quote is agreed for a prefixed amount of a foreign currency

Question 18

what is a price revision clause

Answer 18

self-insurance

Question 19

what is compensation

Answer 19

compensate payments a firm has to make and has to receive in the same currencies

Question 20

what are swaps

Answer 20

sell spare currency to acquire the currency required to make payments

Question 21

when may the risk of order cancellation occur

Answer 21

between the exporter receiving the order until shipment of goods

Question 22

what are the coverage methods of risk of order cancellation

Answer 22

advanced payment, guarantee of compliance, letter credit, insurance policy

Question 23

what causes more harm than order cancellation to the exporter

Answer 23

if the importer doesn’t collect or claim responsibility of the good when they arrive at their destination

Question 24

what are the coverage methods of risk of non-acceptance/non-collection of goods

Answer 24

guarantee of compliance, letter of credit, insurance policy, recovery of goods

Question 25

what are the coverage methods of non-payment risk

Answer 25

letter of credit, documentary payment order, insurance policy, factoring

Question 26

what is political risk in this context

Answer 26

when the political or economic circumstances of the designation country prevent the punctual completion of payment or the correct completion of contracts

Question 27

what are the coverage methods of political risk and unforeseeable risk

Answer 27

insurance policy, confirmed letter of credit, officially supported export credits, forfeiting, factoring

Question 28

what is unforeseeable risk in this context

Answer 28

catastrophic events whose consequences limit the ability of the affected country to obtain the necessary currency to pay for its foreign orders

Question 29

what is the CESCE

Answer 29

spanish insurance institution (1971)

Question 30

what is the main task of the CESCE

Answer 30

manage political and unforeseeable risks exclusively, representing the state

Question 31

what is factoring

Answer 31

a specialised company that offers administrative services and/or financial support for exporters in relation to short-term trade credits related to foreign sales

Question 32

what are the types of factoring

Answer 32

• without recourse: factoring company assumes the non-payment risk (can be used as payment insurance)
• with recourse: factoring company does not assume the non-payment risk, only provides services

Question 33

what are the administrative and financial services of factoring companies

Answer 33

• study of the degree of solvency of an importing client
• invoice collection management
• management of the exporter debtors portfolio
• ensure 100% of payment
• advance funds to the exporter

Question 34

what are the advantages of SMEs using factoring companies

Answer 34

• security and comfort in payments
• management of firm risk
• possibility to obtain advance payments

Question 35

main risks and coverage for export and importer

Answer 35

check last slide of topic 7