Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

FIN 436 > Final Exam > Flashcards

Final Exam Flashcards

(60 cards)

Start Studying
1
Q

Foreign Exchange Exposure & Goal of Management

A

A measure of the potential for a firms profitability, net cash flow and market value to change becasue of a change in exchange rates.

Goal= Stable Cash Flows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Transaction Exposure Measures…

A

Changes in the value of outstanding finanical obligations incurred prior to change in exchange rates but not due to be settled until after the exchange rates change

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Con’s of Hedging

A
  1. Shareholders are more capable of diversifying risk than management
  2. Managing currecny risk does not increase expected cash flows
  3. Management incentives
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Pro’s of Hedging

A
  1. Reduction of risk of future CF’s improves planning capability
  2. Reduction of risk of future CFs reduces likelihood that CFs will fall below necessary minimum
  3. Management has comparative advantage because they know the actual currency risk of the firm
  4. Markets are usually in disequalibrium because of structural and institutional preferences
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Define Transaction Exposure

A

Gains or losses that arise from the settlement of existing financial obligations due to acquiring assets or incurring liabilities denominated in foreign currencies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

4 Ways to Hedge

A
  1. Remain Unhedged
  2. Forward Market
  3. Money Market
  4. Options Market
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Remain Unhedged (Pros & Cons)

A 
Pros
1. could get upside potential with no fee
2. no cash outlay
Cons
1. RISKY!
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Forward Contract (Pros & Cons)

A 
Pros
1. Certain
2. Off balance sheet
3. No cash outlay upfront
Cons
1. Always lock in a loss
2. No upside potenital
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Explian a Money Market Hegde

A
  • Manipulates balance sheet to hedge
  • Want to match currency, amount & maturity across balance sheet
  • Goal: avoid future spot market
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Money Market Hedge (Pros & Cons)

A 
Pros
1. 100% Certain
2. Cash inflow on day 1
3. Tailored
Cons
1. Investment rates
2. On balance sheet
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Options Market (Pros & Cons)

A 
Pros
1. Certain
2. Off balance sheet
3. Flexible
4. Upside/downside potential
Cons
1. Premium on day 1 (outflow)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Natural Hedge

A

Refers to offsetting operating cash flows, a payable arising from the conduct of business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Accounts Recieveable Concern

A

Depreciation of foreign currency because you get less dollars when you convert in spot market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Booked Value Formula

A

= Contract Size x Spot

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

True Cost Formula

A

= Premium + Opportunity Cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Accounts Payable Concern

A

Appreciation of foreign currency because you will have to pay more dollar when converting in spot market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Chapter 10 Summary (6)

A
  1. Transaction Exposure
  2. Per contract basis (AP & AR)
  3. Short Term
  4. Expected
  5. Reactive
  6. Supplement “artifical” “add on”
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Define Translation Exposure

A

Is the potential for an increase of decrease in the parents net worth and reported income caused by a change in exchange rate since the last consolidation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Translation Exposure is also know as

A

Accounting Exposure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Why does Transaction Exposure arise

A

because the finanical statements of foreign subsidaries must be restated in the parents reporting currency for the firm to prepare consolidated statements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Who determine which spot rate is used to “translate” all cash flows

A

Accountants & FASB Rules

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Problems in Translation Exposure

A

The choice of spot rate can influence the earning and net worth of a MNC depending on wheather the spot rate is strong or weak for foreign currencies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

List Translation Methods

A
  1. The Current Method

2. The Temporal Method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Define the Current Method of tranlation

A

Uses current exchange rate on the balance sheet date

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Define the Temporal Method of translation
Uses the exchange rate with timimg of a specfic assets of liabilities creation
26
Why Hedge with a Forward Contract
a MNC may try to lock in a high sell price of foreign currency with a foward or future contract to prevent effects of a weakening currency
27
Balance Sheet Hedge
Requires an equal amount of exposed foreign currency assets and liabilities on a firms consolidated balance sheet
28
Chapter 11 Summary (4)
1. Translation Exposure 2. MNC Basis 3. Finanical Statments 4. Net Worth
29
Operating Exposure is also known as
1. Economic Exposure 2. Competitive Exposure 3. Strategic Exposure
30
Operating Exposure measures
any change in the present value of a firm resulting from changing future operating cash flows caused from unexpected changes in exchanges rates.
31
Operating Exposure depends on...
whether an unexpected change in exchange rates causes unanticipated change in sales volume, prices or operating costs.
32
Operating Exposure objective
to predict the longer term cash flow impact of unanticipated exchange rate changes
33
Operating cash flows
arise from inter and intra company: - recieveables & payables - rent - lease payments - royalty & licensing fees
34
Financing cash flows
are payments for the use of inter and intra company loans and stockholder equity
35
5 proactive policies for operating exposure
1. Matching Currency Cash Flows 2. Risk Sharing Agreements 3. Back-to-Back loans (parellel loans) 4. Currency Swaps 5. Leading and Lagging
36
Matching Currency Cash Flows
one way to offset an anticiapted continuous long exposure to a particular currency is to acquire debt or payables denominated in that currency
37
Match Currency Cash Flows results in
a continuous receipt of payment and a continuous outflow of the same currency
38
When is "matching currency cash flows" called a Natural Hedge
Through the conduct of regular operations | - must be constant and predictable overtime
39
Risk Sharing Agreement
a contractual arrangement in which the buyer and seller agree to share or split currency movement impacts on payments. - Most important in establishing and maintaining long term relationships
40
Back-to-Back Loans (Parellel loans)
Two firms in different countries arrange to borrow each others currency for a specific period of time (credit swap)
41
7 aspects to Back-to-Back Loans
1. two loans of equal amounts @ current spot rate. 2. at maturity return borrowed currency 3. conducted outside forex but uses spot quotes as reference 4. create a covered hedge 5. difficult to find counter party 6. counter party risk 7. maintenance of prinicpal clause
42
Cover Hedge (3)
1. Borrow and repay same currency 2. Better rates 3. No need for collateral
43
Back-to-Back loan Problems (3)
1. Counterparty risk 2. Finding a partner 3. Loan is ON balance sheet
44
Back-to-Back Loan Benefits (4)
1. Avoid spot and capital markets 2. No regulation 3. No currency mismatch 4. Real contract so your protected
45
5 most popular currencies
1. US Dollar 2. Japanese Yen 3. Euro 4. Swiss Franc 5. British Pound
46
Currency Swaps
Swap dealer and Firm agree to exchange equivalent amounts of two different currencies for a specific period of time
47
4 aspects of currency swaps
1. can negotiate wide range of maturites 2. can have fee to compensate for interest rate differential 3. Off balance Sheet 4. Avoids both translation & operating exposure
48
Currency Swap is treated as a
FOREX transaction
49
Reversing swap is treated as
Forward Contract
50
7 Currency Swap Advantages
1. Off Balance sheet 2. Cheaper than cash market 3. simple documentation 4. customizible 5. can be reversed 6. Blind Basis 7. reduced counterparty risk
51
Currency Swaps Disadvantages
Unlimited loss potential if exchange rates move against you
52
Leading & Lagging Approach
are about the retiming of the transfer of funds | - some now attempt to hedge operating exposure by scheduling payments to coordinate with currency values
53
Leading & Lagging can reduce
Both operating and tranaction exposure by accelerating or decelerating the timing of payments that must be made or recieved in foreign currencies (burden shifting)
54
Leading =
Pay Early / Collect Early
55
Lagging=
Pay Late / Collect Late
56
Whats the point of leading and lagging approach
to use currencies when they are most valuable - Pay @ cheapest - Recieve @ strongest
57
Leading and lagging process can be completed..
Inter Company or Intra Company
58
Inter- Company
Much more difficult , must offer a discount to get other to comply
59
Intra- Company
Work with affiliates to arrange payments - can be tricky - works best with 100% MNE Ownership - must manage international laws/ regualtions
60
Chapter 12 Summary (7)
1. Operating Exposure 2. Whole Firm 3. Long Term 4. 5 Policies 5. Unanticipated 6. Proactive 7. Natural Hedge (fold into op cycle)

FIN 436 (2 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions