Deck 15 Flashcards Preview

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Flashcards in Deck 15 Deck (20):
1

Factors that drive Globalization

1) Improvements in transportation, 2) Technology improvements, 3) deregulation of international markets, and 4)operational options

2

Globalization promotes

Specialization and comparative advantage

3

Direct Foreign Investment

purchasing a foreign company as a subsidiary

4

Emerging nations include (BRIC)

Brazil, Russia, India, and China

5

Functional vs. Systematic interdependence

Functional: nations participate in worldwide institutions; Systematic: all members of the global community share the planet earth

6

Put vs. Call option

Put: gives its owner the right to sell a security at a specified price and time (used for receivables) ; Call: gives its owner the right to buy a security at a specified price and time (payables)

7

Risk-averse behavior

Increase in risk results in an increase in required rate of return (certainty equivalent is less than expected rate of return)

8

Risk-seeking behavior

Increase in risk results in a decrease in required rate of return

9

Diversifiable risk

Unique to specific business; unsystematic or firm specific risk

10

Nondiversifiable risk

Impacts everyone (systematic or market risk)

11

Simple interest =

Principal x interest rate x number of periods

12

Compound interest =

Principal x (1 + i) ^n

13

Objectie probability is

Based on past outcomes; number of times an event will occur divided by the total number of outcomes

14

Subjective probability is

Based on an individuals believe and judgement

15

Expected value is

The weighted-average of the probable outcomes

16

Factors influencing exchange rates

Trade factors (inflation rate, income levels, and government control) and Financial factors ( interest rates)

17

Effect of currency appreciation (becomes stronger)

It becomes more expensive in terms of a foreign currency (A/R and A/P decrease)

18

Transaction exposure

Company could suffer loss/gain upon settlement of transaction due to changes in exchange rates

19

Economic Exposure

PV of cash flows changes due to changes in exchange rates

20

Translation exposure increases when

Proportion of foreign involvement increases