11-14 Flashcards
(33 cards)
What are federally chartered subsidiaries allwed to engage in a full range of international banking activities
edge act banks
a US comp is expected to recieve 100 euros in 120 days. If the company wants to min the risk of foreign exchange, then it would
- buy british pounds forward
- sell b pound forward
- buy b pound 120 days from now
- sell b pounds 120 days from now
- sell b pounds on current spot market
sell b pound forward
since you’re going to recieve it want to min risk by selling it now. This option gives you the option to sell it today and it expires in 120 days
The recognized methods for consolidating the fin reports of a MNC are:
- short/long term method, current/future method, flexible/inflexible, economic and noneconomic
- current/noncurrent,monetary/nonmonetary, short/long term, current/future
- current/noncurrent, monetary/nonmonetary, temporal, current rate method
- temporal method, current rate method, flexible/inflexible, economic/noneconomic
c
Suppose the quote for a 5 year swap w semiannual pmt is 8.50-8.60 percent. THis means
- the swap bank will pay semiannual fied rate of 8.60 against recieving LIBOR
- the swap bank will recieve semiannual fied rate of 8.50 against recieving LIBOR
- if the swap bank is successful in getting counterparties to both legs of the swap at these prices, he will have an annual profit of ten basis points
3
8.6-8.5= .1 which is 10 basis points
(ON BOARD) A swap bank proposes the following interest only swap: Y will pay the swap bank annual pmts on $10,000,000 with a fixed rate of 9.90%. In exchange the swap bank will pay to company Y interest pmts on $10,000,000 at LIBOR -.15%. WHat is the value of the swap to company Y
campany y will save 45 basis points per year on $10,000,000= 45,000/year
A swap bank makes the following quotes for 5 year swap and AAA rated firms:
USD:
Bid: 5%
Ask: 5.2
Euro: Bid: 7% Ask: 7.2% the bank stand ready to pay $5.2% the bank stand reasy to recieve 7% (euro) the bank stands ready to pay 7% euro
c
The underlying principle of the current/noncurrent method is that assets and liabilities should be translated on their maturity:
a. current assets and liabilities are converted at the current exchange rate in effect when the cash flow associated w the asset or liability actually occurred. Non current assets and lib are translated at the historical ex rate that prevailed when the asset was recognized
b. current assets and lib, which by definition have a maturity of 1 year or less, are converted at the current ex. rate. Non current assets and lib are translated at the hist exchange rate
c. all assets and lib are converted at the curent ex. rate
b
Comp a is a us company and comp B is a italian company. A wants to borrow 1,000 euro for one year and b wants to borrow $2,000 for one year. spot exchage rate: $2=1 euro USD: bid: 8% ask: 8.1%
euro:
bid: 6%
ask: 6.1%
The firms external borrowing opp. are:
comp A euro borrowing: 7%
Comp b euro borrowing: 6%
comp A $ borrowing: 8%
Comp b $ borrowing: 9%
a firm A does 2 swaps, $ at bid and euro at ask. Firm b does 2 swaps, $ at ask and euro at bid
b a firm A does 2 swaps, $ at ask and euro at bid. Firm b does 2 swaps, $ at bid and euro at ask
a
A bank may establish a MN operation for the reason of low marginal costs. The underlying reason is that
a. banks follow their mn customers abroad to prevent the erosion of their clientele to foreign banks seeing to service the MN foreign subsidiaries
b. mn banking operations help a bank prevent the erosion of its travelers check, tourist, and foreign business markets from foreign bank competition
c. managerial and marketing knowledge developed at home can be used abroad with low marginal costs
d. the foreign bank subsidiary can draw on the parent banks knowledge of personal contacts and credit investigations for use in that foreign market
c
the sensitivity of realized domestic currency values of the firms contractual cash flows denominated in foreign currencies to unexpected exchange rate changes
transaction exposure
the extent to which the value of the firm would be affected by unanticipated changes in exchange rate
economic exposure
the potential that the firms consolidated fin statements can be affected by changes in ex. rates
translation exposure
Exchange rate risk of a foreign currency payable is an ex of
transaction exposure
translation exposure
economic exposure
transaction exposure
to hedge against a foreign currency recievable buy call option buy put option sell call option sell put option
b
an exporter faced w exposure to depr. currency can reduce transaction exposure w a strategy of paying or collecting early paying or collecting late paying late, collecting early paying early, collecting late
c
if you’re going to pay foreign currency in future,
buy currency forward
if you’re going to receive foreign currency in future,
sell currency forward
For futures payable, borrow ___ and invest ____
home, foreign
For futures receivable , borrow ___ and invest ____
foreign, home
How to hedge transaction exposure?
forward market hedge, money market, and options hedge
How to hedge economic exposure?
operational hedging, forward hedging, options hedging
This banking relationship exists when 2 banks maintain deposits in each other; allows mnc clients to conduct biz worldwide
correspondent bank
small service facility staffed by parent bank personnel that is designed to assist mnc client of parent bank in dealings w bank correspondents
representative offices
operates like a local bank, but it is legally part of parent bank; subject to both banking regulations of home country and foreign country; Can provide more services than representative office
foreign branches
