Term
| When are balance sheet hedges appropriate/justified? |
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Definition
1. Foregin subsidiary is about to be liquidated
2. The firm has bank agreements that state the firm's debt/equity ratios will be maintained within specific limits
3. Mgmt. is evaluated based on balance sheet measures affected by translation loss/gains
4. Foreign subsidiary is operating in a hyperinflationary environment
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Term
| How do you evaluate the effectiveness of a balance sheet hedge? |
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Definition
| The hedge is effective if the assets and liabilities in the targeted subsidiary are equal |
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Term
| Currency swap (definition) |
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Definition
Exchange of a set of cash flows denominated in currency A for a set of cash flows denominated in currency B
Example: Swiss franc interest payments in exchange for U.S. dollar interest payments. |
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Term
| Interest rate swap (definition) |
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Definition
| exchange a set of fixed rate cash flows for a set of floating rate cash flows |
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Term
| Plain vanilla swap (definition) |
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Definition
| exchange of fixed-rate for floating-rate financial obligations. Largest single financial derivative market in the world |
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Term
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Definition
| The cash flows of an interest rate swap are interest rates applied to a set amount of capital |
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Term
| Time line of transaction exposure |
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Definition
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Term
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Definition
| Time between quoting a price and reachign a contractual sale |
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Term
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Definition
| Time it takes to fill the order after contract is signed |
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Term
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Definition
| Time it takes to get paid in cash after A/R is issued |
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Term
| Hedging possibilities for hedging future accounts receivable and accounts payable |
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Definition
| Instead of selling for A/R, you buy a contract now for the future to hedge exposure for A/P |
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Term
| Self-stustaining foreign entity |
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Definition
| operates in the local economic environment independent of the parent company |
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Term
| Integrated foreign subsidiary entity (def.) |
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Definition
| Operates as an extension of the parent company, with cash flows and general business lines that are highly interrelated with those of the parent |
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Term
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Definition
| The currency of the primary economic environment in which the subsidiary operates and in which it generates cash flows |
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