Week 6 Developments in Global Finance

Question 1

What are the five principles of Accounting?

Answer 1

1) The Revenue recognition principle: A firms revenue is earned and recorded at the point of sale

2) The expense principle: An expense occurs at the time that a firm accepts goods or services from another entity

3) The matching principle: You should match each item of revenue with an item of expense

4) The Cost Principle: You should use the historical costs of an item in the books not its resell cost

5) The objective principle: You should always use factuale and verifiable information in the books, never of measurement of values

Question 2

What is the IFRS?

Internations Financial Reporting Standards

IASB

Answer 2

A set of international accounting standards issued by the IASB which specify exactly how accountants should maintain and report their accounts

Question 3

What is stakeholder theory?

Answer 3

Stakeholder theory states that corporations have a responsibility not only towards their shareholders but primarily towards
-Customers
-Employees
-Society

Question 4

What is the main priority of a firm in a market economy?

Answer 4

To maximise their shareholders value within the legal arrangements that are related to social and environmental issues

Question 5

In what 3 areas will effective global firm sustainability produce positive results in?

Answer 5

1) Strengthening people and communities by improving working conditions
2) Securing limited resources such as water and raw materials, thus reducing waste
3) Improving efficiency and the profitability of the firm in the long run

Question 6

What is the new management model?

Answer 6

1) The new management model accepts that profitability and growth are important but also understands that firms should attempt more seriously to reach social objectives such as enivronmental protection

2) Stakeholders are kept informed of all important operating results through financial reporting

Question 7

What is the ESG?

Answer 7

1) Environmental, social and governance- a set of standards measuring a busines’s ipact on society, the environment, and tis transparency and accountability

Question 8

What is the GRI?

Answer 8

1) Global reporting initiative- an intentional, multi stakeholder and independent non-profit organisation that promotes economic, environmental and social sustainability

Question 9

What are the governments primary aims for the economy?

5 Points

Answer 9

1) Full employment
2) Price Stability
3) Economic growth
4) Redistribution of Income
5) Balance of payments stability

Question 10

What is it meant by Full Employment?

Answer 10

When people who are willing and able to work can find employment effecitvely

Question 11

What is meant by Price Stability?

3 Points

Answer 11

1) Greater economic certainty
2) Preventing the country’s products from losing international competitiveness
3) Common target is 2%

Question 12

What is meant by Economic growth?

3 Points

Answer 12

1) Increased output in the short run
2) Long run sustained productive potential
3) Producing more goods and services to raise living standards

Question 12

What is it meant by redistribution of income?

3 Points

Answer 12

1) Through taxation and spending money is spread more evenly in the economy
2) Money raised is spent on the poor through housing benefits or unemployment benefit etc
3) Money raised can be spent on education and health to benefit the poor

Question 12

What is it meant by Balance of Payments stability?

1 Point

Answer 12

Value of exports equal to the value of imports

Question 13

What are the two main characteristics of Fiscal Policy?

2 Points

Answer 13

1) Changes in government spending
2) Changes in taxation

Question 14

What are the two main characteristics of Monetary Policy?

Answer 14

1) Changes in money supply
2) Changes in interest rates

Question 15

What is the gold standard system?

Answer 15

1) Currencies were pegged to gold and there was a conversion rate for each currency

Question 16

What is the Exchange rate system?

Answer 16

1) Overseen by the IMF who provide guidelines to governments on managing their curency
2) Currenicies can range from fixed rate to free floating
-Pegged Exchange rate = pegged to another currency such as the US$
-The peg is adopted to provide stability annd is favoured in areas such as emerging economies

Question 17

Explain International capital markets?

Answer 17

1) MNE’s raise capital by offering shares to investors (equity funding) and by borrowing (debit financing)
2) The capital markets are flows of capital including equity and debt markets

Question 18

What are equity markets?

Answer 18

1) Equity markets are created when shares in listen companies are traded on the stock exchange, launced by an IPO (Initial Public Offering)

Question 19

Explain debt financing?

Answer 19

1) A bond is a loan instrument which promises to pay a fixed sum on a fixed date in time, and to pay interest to the lender
2) Bonds are used by both governments and Companies

Question 20

What are hedge funds?

Answer 20

Hedge funds are investment funds active in bond markets, (known for their specfulative behaviour)

Question 21

Why has Globalisation have increased risks?

Answer 21

1) Derivatives markets are largely unregulated
2) Hedge funds are active in these derivative markets in sovereign debt instruments
3) Some known as vulture funds purchase risky government bonds in the secondary markets known as ‘junk bonds’ and pursue legal actions against governments for a full payment e.g. Argentina

Question 21

What are Private Equity Funds?

Answer 21

Investment funds which focus on buyout activities, often financed by debt

Question 22

What are National financial crises?

Answer 22

National financial crises can occur when these national systems become vulnerable through a ‘currency crisis’ whereby banks are exposed to debr in foriegn currency

Question 23

What are some causes of national financial crises?

(3 Points)

Answer 23

1) Openness to volatile global financial flows
2) Accumulation of too much debt: government, corporate and household debt
3) Failing currency and dollar-denominated debt

e.g. Russia currency crisis in 1998