INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST, Exams of Finance

Download INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST and more Exams Finance in PDF only on Docsity! INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST EXAM SOLUTION GRADED A+ FOR SUCCESS How many types of foreign currency exposure are there? and what are they? - CORRECT ANSWERS Three. Transaction exposure, economic exposure, and translation exposure What is Transaction Exposure? - CORRECT ANSWERS The potential change in the value of financial positions due to changes in the exchange rate between the inception of a contract and the settlement of the contract This occurs when a firm is faces contractual cash flows that are fixed in foreign currencies What is Economic exposure? - CORRECT ANSWERS The possibility that cash flows and the value of the firm may be affected by unanticipated changes in the exchange rates what is translation exposure? - CORRECT ANSWERS The effect of an an. unanticipated change in the exchange rates on the consolidated financial reports of an MNC Suppose a US firm sold its product to a German client on three-month credit terms and invoiced €1 million- When the U.S. firm received €1m in three months, it will have to convert (unless it hedges) the euros into dollars at the spot exchange rate prevailing on the maturity date, which cannot be known in advance. This is an example of what kind of foreign currency exposure? - CORRECT ANSWERS Transaction exposure How can firms hedge against exposure? - CORRECT ANSWERS Financial Contracts: - Forward contracts, money market instruments, options contracts, and swap contracts Operational Techniques - Choice of the invoice currency, lead/lag strategy, and exposure netting Should a firm hedge? Why or why not? - CORRECT ANSWERS No consensus on the question of whether a firm should hedge; Most arguments suggesting corporate exposure management will not add value to the firm hold in the case of a "perfect" capital market INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST EXAM SOLUTION GRADED A+ FOR SUCCESS Someone can make a case for corporate risk management based on various market imperfections such as....? - CORRECT ANSWERS 1. Information asymmetry 2. Differential transaction costs 3. Default costs 4. Progressive corporate taxes Suppose Boeing Corporation exported a landing gear of Boeing 737 aircraft to British Airways and billed £10 million payable in one year, with money market interest rates and foreign exchange rates given as follows: - U.S. interest rate: 6.10% per annum - U.K. interest rate: 9% per annum - Spot exchange rate: $1.50/£ - Forward exchange rate: $1.46/£ (1-year maturity)• When Boeing receives £10m in one year, it will convert the pounds into dollars at the spot exchange rate prevailing at the time. If Boeing enters a forward contract what will the company receive? - CORRECT ANSWERS On the maturity date of the contract, Boeing will have to deliver £10m to the bank, which is the counterparty of the contract, and, in return, take delivery of $14.6m ($1.46/£ * £10m), regardless of the spot exchange rate that may prevail on the maturity date8-8Cop what is a forward contract? - CORRECT ANSWERS An agreement (contract) to buy or sell a specified commodity in the future at a price determined at the time the forward contract is executed Suppose that on the maturity date of the forward contract, the spot rate turns out to be $1.40/£, which is less than the forward rate, $1.46/£ - Boeing would have received $14m instead of $14.6m had it not entered the forward contract • What if the spot rate had been $1.50/£ at maturity? INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST EXAM SOLUTION GRADED A+ FOR SUCCESS What is an options market hedge? - CORRECT ANSWERS Firm may buy a foreign currency call (put) option to hedge its foreign currency payables (receivables) What is the following scenario an example of? Suppose that in the OTC market, Boeing purchased a put option on £10m with an exercise price of $1.46/£ and a one-year expiration, and assume the option premium (price) was $0.02 per pound - Boeing paid $200,000 (= $0.02 * 10 million) for the option - Provides Boeing with the right, but not the obligation, to sell up to £10m for $1.46/£, regardless of the future spot rate - CORRECT ANSWERS An options market hedge Money market hedge vs forward hedge - CORRECT ANSWERS Money market hedge dominates since the guaranteed dollar proceeds from the British sale with the money market hedge exceeds guaranteed proceeds with forward hedge Money market hedge versus options hedge - CORRECT ANSWERS Options hedge dominates money market hedge for future spot rates greater than $1.4813/£, but money market hedge dominates options hedge for spot rates lower than $1.4813/£ Options hedge versus forward hedge - CORRECT ANSWERS Options hedge dominates the forward hedge for future spot rates greater than $1.48 per pound, whereas the opposite holds for spot rates lower than $1.48 per pound TRUE OR FALSE: if the firm has positions in less liquid currencies (e.g., Indonesian rupiah, Thai bhat, and Czech koruna), it may be either very costly or impossible to use financial contracts in these currencies - CORRECT ANSWERS true What is cross-hedging? - CORRECT ANSWERS cross-hedging, which involves hedging a position in one asset by taking position in another asset What provides an effective hedge against contingent exposure? - CORRECT ANSWERS Options contracts INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST EXAM SOLUTION GRADED A+ FOR SUCCESS What is contingent exposure? - CORRECT ANSWERS Contingent exposure is the risk due to uncertain situations in which a firm does not know if it will face exchange risk exposure in the future The following scenario is an example of which type of exposure? Suppose GE is bidding on a hydroelectric project in Canada. If the bid is accepted, which will be known in three months, GE is going to receive C$100m to initiate the project. GE may or may not face exchange exposure. - CORRECT ANSWERS contingent exposure What is an effective method of hedging recurrent exposure? - CORRECT ANSWERS Swap contracts Whaat is a currency swap contract? - CORRECT ANSWERS Currency swap contracts are agreements to exchange one currency for another at a predetermined exchange rate, that is, the swap rate, on a sequence of future dates Similar to a portfolio of forward contracts with different maturities Very flexible in terms of amount and maturity, with maturity ranging from a few months to 20 years What does it mean to hedge through invoice currency? - CORRECT ANSWERS Hedging through invoice currency is an operational technique that allows the firm to shift, share, or diversify exchange risk by appropriately choosing the currency of invoice The following scenario is an example of which hedging technique? If Boeing invoices $150m rather than £100m for the sale of aircraft, it does not face exchange exposure anymore. Though the exchange exposure has not disappeared, it has been shifted to the British importer. Another option would be for Boeing to invoice half of the bill in U.S. dollars and the remaining half in British pounds, thereby sharing the exchange exposure INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST EXAM SOLUTION GRADED A+ FOR SUCCESS Finally, the firm can diversify exchange exposure to some extent by using currency basket units, such as the SDR, as the invoice currency - CORRECT ANSWERS Hedging through invoice currency What is hedging via lead/lag strategy? - CORRECT ANSWERS The lead/lag strategy reduces transaction exposure by paying or collecting foreign financial obligations early (lead) or late (lag) depending on whether the currency is hard or soft What are the challenges associated with lead/lag strategy? - CORRECT ANSWERS If we assume Boeing would like BA to prepay £100m, we can also assume BA would have no incentive to do so unless they received a substantial discount to compensate for prepayment Pushing BA to prepay may hurt future sales efforts by Boeing To the extent the original invoice price incorporated the expected depreciation of the pound, Boeing is already partially protected against depreciation of the pound What is exposure netting? - CORRECT ANSWERS Exposure netting is hedging only the net exposure by firms that have both payable and receivables in foreign currencies For firms that would like to apply this approach aggressively, it helps to centralize the firm's exchange exposure management function in one location Many MNCs are using a reinvoice center, a financial subsidiary, as a mechanism for centralizing exposure management functions What Risk Management Products Do Firms Use? - CORRECT ANSWERS Among U.S. corporations, based on a survey of Fortune 500 firms, the most popular product was the traditional forward contract Authors document a great discrepancy between what firms say they do versus what they actually do, attributing the discord to attempts by companies to time their hedges International Banking Services can be distinguished from domestic banks because they....? - CORRECT ANSWERS Facilitate the imports and exports of their clients by arranging trade financing INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST EXAM SOLUTION GRADED A+ FOR SUCCESS What is a foreign branch bank? - CORRECT ANSWERS A foreign branch bank operates like a local bank but is legally a part of the parent bank- Subject to both the banking regulations of home country and the country in which it operates Why would a foreign branch bank be established? - CORRECT ANSWERS Can provide a much fuller range of services for its MNC customers than can be provided through a representative office - Books of a foreign branch are part of the parent bank's books - Facilitates competition on a local level with banks of the host country What are subsidiary and affiliate banks? - CORRECT ANSWERS Both subsidiary and affiliate banks operate under the banking laws of the country in which they are incorporated - A subsidiary bank is a locally incorporated bank that is either wholly owned or owned in major part by a foreign parent - An affiliate bank is one that is only partially owned but not controlled by its foreign parent • U.S. parent banks find subsidiary and affiliate banking structures desirable because they can underwrite securities What is an Edge Act bank? - CORRECT ANSWERS Edge Act banks are federally chartered subsidiaries of U.S. banks that are physically located in the U.S. and can engage in a full range of international banking activities - Edge Act banks are typically located in a state different from that of its parent to get around the prohibition on interstate branch banking - Edge Act banks are not prohibited from owning equity in business corporations, unlike domestic commercial banks INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST EXAM SOLUTION GRADED A+ FOR SUCCESS What is an offshore banking center? - CORRECT ANSWERS An offshore banking center is a country whose banking system is organized to permit external accounts beyond the normal economic activity of the country - Offshore banks operate as branches or subsidiaries of the parent bank • Principal features that make a country attractive for establishing an offshore banking operation are virtually total freedom from host-country governmental banking regulations What are international banking facilities? - CORRECT ANSWERS An international banking facility (IBF) is a separate set of asset and liability accounts that are segregated on the parent bank's books, though it is not a unique physical or legal entity - Any U.S.-chartered depository institution, a U.S. branch or subsidiary of a foreign bank, or a U.S. office of an Edge Act bank may operate an IBF • Originally established largely as a result of the success of offshore banking - Have been successful in capturing a large portion of Eurodollar business previously handled offshore What is bank capital adequacy? - CORRECT ANSWERS Bank capital adequacy refers to the amount of equity capital and other securities a bank holds as reserves against risky assets to reduce the probability of a bank failure What are the three pillars of capital adequacy? - CORRECT ANSWERS Minimum capital requirements Supervisory review process Effective use of market discipline What is eurocurrency? - CORRECT ANSWERS Eurocurrency is a time deposit in an international bank located in a country different from the country that issued the currency- For example, Eurodollars are deposits of U.S. dollars in banks located outside of the U.S., while Eurosterling are deposits of British pound sterling in banks outside of the U.K. INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST EXAM SOLUTION GRADED A+ FOR SUCCESS Eurocurrency market is an _________________ banking system that runs __________ to the _____________ banking system of the country that issued the currency the origin of the eurocurrency market can be traced back to the 1950s and 1960s - CORRECT ANSWERS interbank; parallel; domestic Common reference rates in the eurocurrency market include: LIBOR = _____________________________- SIBOR = ______________________________ TIBOR = _______________________________ - CORRECT ANSWERS - LIBOR (London Interbank Offered Rate) - SIBOR (Singapore Interbank Offered Rate) - TIBOR (Tokyo Interbank Offered Rate) What is Euribor? - CORRECT ANSWERS EURIBOR is the rate at which interbank time deposits of the euro are offered by one prime bank to another in the euro zone What are eurocredits? - CORRECT ANSWERS Eurocredits are short- to medium-term loans of Eurocurrency extended by Eurobanks Loans are denominated in currencies other than the home currency of the Eurobank - Because the loans are often too large for one bank to handle, Eurobanks will band together to form a bank lending syndicate to share the risk • Credit risk on these loans is greater than on loans to other banks in the interbank market - Interest rate on Eurocredits must compensate the bank for the added credit risk INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST EXAM SOLUTION GRADED A+ FOR SUCCESS As part of debt rescheduling agreements among the bank lending syndicates and the debtor nations, creditor banks would sell their loans for U.S. dollars at discounts from face value to MNCs desiring to make equity investment in subsidiaries or local firms in the LDCs - LDC central bank would buy the bank debt from an MNC at a smaller discount than the MNC paid, but in local currency. - The MNC would use the local currency to make preapproved new investment in the LDC that was economically or socially beneficial to the LDC and its populace What was the solution to the international debt crisis? - CORRECT ANSWERS Brady Bonds Brady bonds are loans converted into collateralized bonds with a reduced interest rate devised to resolve the international debt crisis in the late 1980s What three options were creditor banks offered at the end of the international debt crisis? - CORRECT ANSWERS • Creditor banks were offered one of three options: 1. Convert their loans to marketable bonds with a face value equal to 65% of the original loan amount 2. Convert the loans into collateralized bonds with a reduced interest rate of 6.5% (i.e., Brady bonds) 3. Lend additional funds to allow the debtor nations to get on their feet INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST EXAM SOLUTION GRADED A+ FOR SUCCESS What was the Asian crisis? When did it happen? - CORRECT ANSWERS Crisis began in mid-1997 when Thailand devalued the baht. Consequently, other Asian countries devalued their currencies by letting them float. When was the global financial crisis: Credit Crunch? what happened? - CORRECT ANSWERS 2008. Credit crunch, or inability of borrowers to easily obtain credit, began in the U.S. in the summer of 2007 • Origin of credit crunch can be traced back to three key contributing factors: - Liberalization of banking and securities regulation - Global savings glut - Low interest rate environment created by the Federal Reserve in the early part of this decade What two important lessons should be taken away from the global financial crisis? - CORRECT ANSWERS Many lessons should be learned from this crisis, but two important ones are as follows: - Bankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators and then pass it on to MBS investors rather than hold the paper themselves - Decision to allow the CDS market to operate without supervision of the CFTC or some other regulatory agency was a serious error in judgement What is a foreign bond? - CORRECT ANSWERS A foreign bond is offered by a foreign borrower to investors in a national capital market and denominated in that nation's currency• Example: German MNC issuing dollar-denominated bonds to U.S. investors what is a eurobond? - CORRECT ANSWERS A Eurobond issue is denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency• Example: Dutch borrower issuing dollar-denominated bonds to investors in the U.K., Switzerland, and the Netherlands INTERNATIONAL FINANCE FINAL EXAM STUDY WITH CORRECT VERIFIED ANSWERS UPDATE 2023/2024 BEST EXAM SOLUTION GRADED A+ FOR SUCCESS What is a bearer bond? - CORRECT ANSWERS Issuer does not keep any records indicating who is the current owner of the bond - Bearer bonds are very attractive to investors desiring privacy and anonymity, one reason for this being that they enable tax evasion What are registered bonds? - CORRECT ANSWERS Registered bonds, on the other hand, are bonds whose ownership is demonstrated by associating the buyer's name with the bond in the issuer's records Foreign bonds must meet ________________________ of the country in which they are issued - CORRECT ANSWERS security regulations what is shelf registration (bonds)? - CORRECT ANSWERS Rule 415, instituted by the SEC in 1982, allows for shelf registration- Shelf registration allows an issuer to preregister a securities issue, and then shelve the securities for later sale when financing is actually needed What is a global bond? - CORRECT ANSWERS A global bond issue is a very large bond issue that would be difficult to sell in any one country or region of the world - Global bond issues were first offered in 1989 - Simultaneously sold and subsequently traded in major markets worldwide - Most have been denominated in the U.S. dollar - Portion of a U.S. dollar global bond sold by a U.S. (foreign) borrower in the U.S. is classified as a domestic (Yankee) bond and the portion sold elsewhere is a Eurodollar bond Whaat is a straight fixed rate bond? - CORRECT ANSWERS Straight fixed-rate bonds have a specified