Economic Concepts And Analysis

Question 1

Hedging to mitigate foreign transaction exposure. What do you do if you have receivable or payable

Answer 1

If you have RECEIVABLE - risk is that the foreign currency will go down, so you want to SELL
If you have PAYABLE - risk that the foreign currency will go UP, so you want to BUY

Question 2

Forward v future

Answer 2

Future: SMALL!!
Individual transactions; you’re buying a certain number of currency units at a stated date at a negotiated price

Forward: LARGE
Same thing, but large volumes of transactions

Question 3

Required rate of return (5)

Answer 3

Risk free rate (starts w this) + market risk premium + inflation premium + liquidity risk premium + default risk premium

Question 4

Economic risk

Answer 4

Key word: PRESENT VALUE
Represents the potential that the PV of an organizations cash flows could increase or decrease as a result of changes in the exchange rate

Question 5

Credit risk

Answer 5

Exposure to the inability to secure financing or financing at attractive rates

Question 6

regardless of the industry a firm operates, how will a firm maximize its profits? (what equals what?)

Answer 6

MR = MC

marginal cost equals marginal revenue

Question 7

characteristics of monopolistic competition

Answer 7

demand curve is HIGHLY ELASTIC (sensitive to price changes) but still is downward sloping. basically, any small change in price will lead to a large change in quantity demanded

Question 8

monopoly (elastic/inelastic)

Answer 8

inelastic, there are no substitute products available. change in price won’t do that much

Question 9

leading indicator

Answer 9

economic indicator; something that will help PREDICT economic activity. examples: M2 money supply, PMI

lagging indicator - previously happened (prime rate)
coincident indicator - same time (industrial production measured by GDP)

Question 10

expansionary FISCAL policy

Answer 10

more gov spending & lowered taxes

causes the aggregate demand curve to shift RIGHT, real GDP increases

Question 11

three ways gov witll implement monetary policies

Answer 11

open market operations, change the discount rate, change the required reserve ratio

Question 12

decrease in discount rate and decrease in required reserve ratio, do what to the economy

Answer 12

this is an EXPANSIONARY MONETARY POLICY
the goal - to expand the economy
doing this will allow banks to increase money supply

Question 13

spin off transaction

Answer 13

previous subsidiary becoming a new independent company. usually no cash is exchanged

Question 14

if bond cost decreases YoY

Answer 14

this implies market rates are INCREASING
ex: if bond is issued at a discount (say for 95) in y1 and then in y2 the cost is 94, that means the market rate increased slightly, making the discount higher

Question 15

Foreign currency (G/L) for receivable and payable

Answer 15

Receivable:

GAIN is when the foreign currency is worth MORE than the USD