Financial Markets and Risk Management 3

Question 1

Price Risk

Answer 1

Through investments risk of securities/portfolio declining in price

Can be mitigated through diversification and hedging

Question 2

Credit Risk

Answer 2

Risk of default by borrower

Question 3

Liquidity Risk

Answer 3

Exposure to losses from lack of marketability or liquidity of investment

Question 4

Translation risk

Answer 4

Risk of firm earnings translating Financial Statements into function currencies

Question 5

Foreign currency economic risk

Answer 5

Exposes firm to loss on transactions due to fluctuation of exchange rates

Question 6

Transfer Pricing

Answer 6

Pricing strategy for products & services bought and sold internationally amount related parties

Question 7

Goal of Transfer Pricing

Answer 7

minimize tax burden by

1) Minimize net income in places with higher tax rates
2) Maximize net income in places with lower income tax rates

Question 8

Hedging Strategies

Answer 8

1) Forward contracts
2) Currency Swaps
3) Call Options
4) Future Contacts
5) Money Market Hedges

Question 9

If Bonds pricing = 6%

o

Answer 9

1) If interest rates jump to 10% = bad investment

2) If interests rates drop to 4% = sellers’ market