Term
|
Definition
| two parties that make a contractual agreement to exchange cash flows at periodic intervals (in interest rate swap financing) |
|
|
Term
| Single-Currency Int Rate Swap |
|
Definition
INT RATE SWAP. Fixed for floating: one counterarty exchanges the int pmts of a floating rate debt ob for the fixed rate int pmts of the other counterparty. Both obs are denominated in the same currency
Reason: Better match CF, cost savings |
|
|
Term
| Cross Currency Int Rate Swap |
|
Definition
CURRECY SWAP: one counterparty exchages debt service of a bond demoninated in one currency for the debt service of other counterparty denominated in another currency.
Reasons: cost savings hedge LT FX risk |
|
|
Term
|
Definition
| Measures size, reference amt of rincial for determining int pmts |
|
|
Term
|
Definition
| Financial institution that facilitates swaps between counter parties |
|
|
Term
| Quality spread differential |
|
Definition
| : difference between the default-risk premium differential on the fixed-rate debt and the default-risk premium differential on the floating rate debt. Given that a QSD exists, it is possible for each counterparty to issue debt that is least advantageous given financing needs then swap interest payments such that each counterparty ends up with the type of interest payment desired, but at a lower cost than it could arrange on its own. |
|
|
Term
|
Definition
broker: matchers counterparties and assumes no risk--receives commission
Most banks serve as dealers--willing to accept eithe sie of the swap |
|
|
Term
|
Definition
| int exp, trans cost and service charges |
|
|
Term
|
Definition
| swap bank would instruct each parent firm to raise funds in its national capital market where it is well known and has a comparative advantage because of name or brand recognition. Then the principal sums would be exchanged through the swap bank. |
|
|
Term
|
Definition
| argument for the existence and growth of interest rate swaps. All types of debt instruments are not regularly available for all borrowers, thus the swaps assist in tailoring financing to the type desired by a particular borrower. |
|
|
Term
| Foreign direct investments |
|
Definition
| establishment of new production facilities in foreign countries, mergers with existing foreign businesses, Greenfield investment (building brand new facilities). FDI represents an internal organizational expansion by MNCs. |
|
|
Term
|
Definition
| New additions to the existing stocks of FDI |
|
|
Term
|
Definition
| accumulation of previous FDI flows |
|
|
Term
| Factors in decisions to invest overseas |
|
Definition
| trade barriers, imperfect labor market, intangible assets, vertical integration, product life cycle, shareholder diversification services |
|
|
Term
|
Definition
| MNCs often enjoy comparative advantages due to these, like technological, managerial, and marketing know-how, superior R&D capabilities, and brand names |
|
|
Term
| Internalization theory of FDI |
|
Definition
| Firms that have intangible assets with a public good property tend to invest directly in foreign countries in order to use these assets on a larger scale and, at the same time, avoid the misappropriations of intangible assets that may occur while transacting in foreign markets through a market mechanism |
|
|
Term
| Product-life cycle theory |
|
Definition
| when US firms first introduce new products, they keep production at home closer to customers. In early stage, demand is relatively insensitive to price and the pioneering firm can charge a relatively high price and continually improve product based on feedback. As demand develops in foreign countries, US firm begins exporting, begins production to serve local markets. Product becomes standardized and producers relocate to cut production cost. FDI can be interpreted as a defensive move to maintain competitive position. |
|
|
Term
|
Definition
| obtained when the value of the combined firm is greater than the stand-alone valuations of the individual firms |
|
|
Term
|
Definition
| potential losses to the parent firm resulting from adverse political developments in the host country: macro/micro risk, transfer risk, operational risk, control risk |
|
|
Term
|
Definition
| uncertainty about the cross-border flow of capital |
|
|
Term
|
Definition
| Uncertainty regarding ownership and control of local operations |
|
|
Term
|
Definition
| uncertainty regarding ownership and control of local operations |
|
|
Term
| Overseas private investment corporation (OPIC) |
|
Definition
| federally owned organization that offers insurance against the inconvertibility of foreign currencies, expropriation of US owned assets overseas, destruction of US owned physical properties due to war, revolution, and other violent political events, loss of business income due to political violence. Primary goal of encouraging US private investments in economies of developing countries. |
|
|
Term
|
Definition
|
|
Term
|
Definition
| sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes |
|
|
Term
|
Definition
| extend to which the valaue of the firm would affected by unanticipated changes in exchange rates |
|
|
Term
|
Definition
| firms consolidated statement can be affected by changes in exchange rates |
|
|
Term
|
Definition
| hedge transaction exposure by borrowing and lending in the domestic and foreign money markets |
|
|
Term
|
Definition
| use put and call options to limit the downside risk of transaction risk of transaction exposure while preserving the upside potentiatial |
|
|
Term
|
Definition
| hedge exchange risk exposure, currency contract is sold or bought forward |
|
|
Term
|
Definition
| situation in which the firm may or may not be subject to exchange exposure |
|
|
Term
|
Definition
| reducing trans exposure by paying or collecting foreign financial obligations early (lead) or late (lag) depending on whether the currency is hard or soft |
|
|
Term
| Hedging through Invoice Currency |
|
Definition
| invoicing in terms of the home currency of the firms |
|
|
Term
|
Definition
| hedging only the net exposure by firms which have both payables and receivables in foreign currencies |
|
|
Term
|
Definition
| Financial subsidiary to centralize exposure management functions |
|
|
Term
|
Definition
| Info asymmetry, differential trans costs, default costs, progressive corp taxes |
|
|
Term
|
Definition
| contract giving the owner the right, but not the obligation, to buy or sell a given quantity of an asset at a specified price at some time in the future. |
|
|
Term
|
Definition
| Put your number in your phone so you can call me maybe |
|
|
Term
|
Definition
| state price paid/received |
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
| difference between the option premium and the option's intrinsic value is nonnegative is sometimes called the options TV |
|
|
Term
|
Definition
| agreement b/t a buyer or seller and a ftuers exchange in which the buyer or seller agrees to take or make delivery of a specified amount of currency at a specificed price at a designated time |
|
|
Term
| Forwards/Futures Comparison |
|
Definition
Forwards: negotiated trading, self-regulated, 90% delivery, large/customed tailored contract, custom delivery date, custom settlement, Euro quotes (only very qualified parties allowed to participate)Dodd frank trying to regulate
Futures: Mkt-traded (standardized), CFTC (Chicago, won't deliver usually), 5% delivery, smaller/standardized contract, standardized settlement, American terms |
|
|
Term
|
Definition
Contract renegotiated everyday.
Blocks: if not creditworthy enough, canot do forwarrds |
|
|
Term
| Which mkt hedgers prefer? |
|
Definition
| Forwards: timing and customization of currency. If biz risk=cost effective way to get what you want |
|
|
Term
|
Definition
| Futures: Get $ everyday if you're winning. Flexible position can get out of is losing. Can close out loss early before more losses. Wealthy individuals can paritipate if wealth > $1,000,000 |
|
|
Term
| How would arbitrageur participate in futures? |
|
Definition
Looking across futures forwards and options
Mkt develops consensus of everything except UNEXPECTED dah dah dah |
|
|
Term
|
Definition
| Bank written=very popular, large amounts, custom |
|
|
Term
|
Definition
| Exchange traded took off in 70ts, Philadelphia exchange 1982 |
|
|
Term
| Options involve 2 valuation decisions/payoffs |
|
Definition
| determine premium/how much worth AND exercise decisions (relationship spot/exercise, end option holding period) |
|
|
Term
| Black Scholes Option value based on |
|
Definition
| Current exchage rate, exercise price, time to expiration, Rfr, variance |
|
|
Term
|
Definition
Intrinsic value (if any--difference between the exercise and current spot rate)
Time value: the valuation PV--the option mkt participants place on the likelihood that the option's Cash inflows will increase during the remaining life of the ooption due to favorable movement in the spot exchange rate) |
|
|
Term
|
Definition
| 0 SUM GAME. YOU EITHER WIN... or no lose money |
|
|
Term
|
Definition
Limit downside risk while still potential for upside risk
If short (payable): Buy call option and forward hedge, purchase in spot market
Long: long put+long forward=synthetic call.
Must pay premium for felxibility***REVIEW |
|
|
Term
| Companies are not meant to |
|
Definition
|
|
Term
|
Definition
End of BW (Fixed exchange) from stable to variable exchange rates caused market participants to seek ways to ereduce exchage rate risk:
Currency: forwards mkts grew quickly to handle ST currency risk (fairly limited in smaller amt) Limits: LT commitmentments
Debt: Managers found they could use sysmmetric borrowing relationships to reduce LT FX rate risk |
|
|
Term
|
Definition
| Two companies borrow their respective home currencies and loan them to each other |
|
|
Term
|
Definition
two companies borrow their respective home currencies and loan them to each other's subsidiaries
Sub would cost more in other country to borrow b/c less favorable rates-adverse int rates.
Weakness: 1. complex to set up: finding counterpartieis w/ mirror needs 2. default: two sepearate debt contracts in different currencies and legal systems (right of offset, managed well, what if default-which country's jurisdiction) 3. Leverage: While meant to reduce exchange rate risk, the parallel loan uses debt instruments and is on the companies' financial statements as debt (could increase int rates paid) |
|
|
Term
|
Definition
An agreement between two counterparities to exchange pmts in different currencies at specified times ... Grass is greener!!! Hedge FX risk.
1. NO leverage (unlike P/BtB loans)
2. everyone in same place, so no legal jurisdiction problems
Markets overcame flexible exchange rates |
|
|
Term
|
Definition
| an agreement b/t two counterparties to exchange pmts in the same currency based on a notational amount for a given maturity (Focus on the interest instead of the currency risk--no fx currency) |
|
|
Term
|
Definition
rates are adjusted on a semi-annual basis
safety-not locked into rates. |
|
|
Term
|
Definition
| counterparties swap fixed rate pts for floating rate pmts |
|
|
Term
|
Definition
counterparites swap floating rate pmts based on different bases
Us Prime rate: a ST rate charged by commerical banks to their best customers (credit cards rates affected.)
LIBOR: THE RATE OF IN AT WHICH BANKS BORROW FUNDS from other banks, in marketable size, in the London interbank market--unregulated large market. Lower b/c unregulated |
|
|
Term
|
Definition
Swap bank: a financial inst that facilitates swaps
swap dealer: will act as a counter party in swap. Supports trade in standardized interest rate swaps
Swap broker: acts as an intermediary, not a counterparty, in swap--used for complex transactions. aint got risk
Notional amts: the contractual size of the swap contract, used to set interest payments (Principals do not swap, only used to figure out interest rates_ |
|
|
Term
| Borrowing with adjustable rates allows a company to obtain.. |
|
Definition
a lower interest rate.
LT borrow=fixed rate
ST (3 yr)=floating |
|
|
Term
| Risk to creditor reduced by |
|
Definition
Shorter term
Ability to adjust int rates ARM |
|
|
Term
| Quality spread differential |
|
Definition
Fixed difference-floating rate
NOT arbitrage=different markets. Market imperfection to exploit. Erryone happy |
|
|
Term
|
Definition
| take the role of opposite counterparty for swaps of standardized maturity and size |
|
|
Term
|
Definition
| No interest rate risk=only left w/ default risk, but 2 flows of pmts, so do not continue flow of pmts get another swap and sue defaulted company. |
|
|
Term
|
Definition
| Dealer BUY a floating pmt |
|
|
Term
|
Definition
| Dealer will SELL a floating pmt |
|
|
Term
|
Definition
A swap is a LT heding vehicle. If fails may
1. Buyout swap
2. Create an additional swap that creates an inflow of Euros to balance the outflow of Euros from the original swap=mirrow/reverse |
|
|
Term
|
Definition
| w/ the original counterparty |
|
|
Term
|
Definition
| w/ a different counterparty |
|
|
Term
|
Definition
If rates go against us and broke up hedged position, wil suffer but not exposed to future risk
mght not always be negative
could bu out if favorable but to hedge speculation |
|
|
Term
| Mirror swap more common than reverse |
|
Definition
| more common b/c ompay originally had need/purpose for swap |
|
|
Term
| Mirror swap economic cost |
|
Definition
| will cost use the same as buy out--int rakes moved against you, but not as bad as it could have been; cost of having to renegotiate. but pmts will continue (no termination) |
|
|
Term
|
Definition
Risk management: makes mkt more complete=countries have diff regulation
-foreign exchange
-interest rate
Market compleness
-financial mkt segmentation
--regulatory systems
--information systems
Increase profitability! |
|
|
Term
|
Definition
1970's
Forward swaps
Parallel/Back to back loans
Currency swaps
Interest rate swaps
-getting out of swaps (buyout/mirror/reverse swaps)
Combine currency/interest rate swaps |
|
|
Term
|
Definition
process of reducing governent interference in international trade. Balance b/t government and bsiness
China->more toward mkt
France->more toward govt |
|
|
Term
|
Definition
Company that produces and sells goods and services in more than one country
cross border=different exchanges |
|
|
Term
|
Definition
| What is the proper balance b/t mkt choices and goverment management of economic activity |
|
|
Term
|
Definition
| Defined by law and regulation, determine corporate governance |
|
|
Term
|
Definition
| the process by which the goals of the corp are set and complish |
|
|
Term
| US/UK Goals (Anglo Saxon) |
|
Definition
Goal: PROFIT; less MNC is corrupt countries; want contires supporting national industry; Elect board to max SH value
Stockholders->Board of Directors->Managers
Resource mkts->biz firm->product mkt (PROFIT)
Exchange rate has huge impact on profit
Stockholders are residual risk-bearers. They make a profit only if the buxiness
-is efficient in the use of society's scarce resources
-sells only the products that consumers demand
-Life and death competition of capitalism
-Economies based on markets product higher standard of living for their citizens (wmt energy effience to save money, not be green)
China biz not very efficient |
|
|
Term
|
Definition
| econ org that draws on mkts for resources that it can reconfigure to sell as goods and services in mkts @ profit |
|
|
Term
|
Definition
Goal: Maximize benefit of stakeholders. Had to change to compete. Cared too much about stakeholder/employees, but better ethics.
Management board benefits supervisory board of stakeholders (50% workers) |
|
|
Term
|
Definition
Goal: max market share while fostering the economic wellfare of the group
Kerietsu: A jap group of biz menin which members control each other through cross-ownership of shares. usually associated w/ a major bank
Chaebol: Korean conglo of many companies clustered around a parent company usually controlled by a family. Controlled by cross-holdings of shares.
Busienss group very patient/concerned about LT vision>quarterly profits--but getting complacent |
|
|
Term
|
Definition
|
|
Term
|
Definition
| place wehere ppl come together and choose what you're going to buy, if you want to have it and how much |
|
|
Term
|
Definition
Supply=demand
mkt price=value (how much thing worth)=not economic profit
Everyone price taker, no mono/oligarchy. price dictated by what consuemrs want. Not group big enough to influence prices. Small producers competition
info available to everyone. can get info and price appropriately.
Producers adequately compensated--but not econ profit |
|
|
Term
|
Definition
Big Plays (government) Sources Market Imp
-subs product unlevel competitive landscape (agri subsidies)
-Price distortion
-Formal/informal restriction on foreign imports
-Taxes affect and distory
-***Labor and knowledge (techology)some economies crease imperfections via knowledge Efficiency: work smarter not harder |
|
|
Term
|
Definition
Many imperfectionsin resource and product markets. A firm that can exploit these imperfectionswill be more profitable and benefit the economies/societies in which it operates. Decision product sash flow
NPV=PVinflows-PVoutflows
If you can find the best place to do stuff, you win.
-produces wealth
-NVP measure wealth from good biz decisions
-exchange rates impact NPV |
|
|
Term
| What do corp managers focus on? |
|
Definition
Valuation
-how much is asset worth?
-is a liability desired?
Is the company obtaining and using A/L to optimized wealther creation?
-nom terms
-economic (CF) values |
|
|
Term
| How do parity conditions such as PPP/IRP affect firm's FX exposure? |
|
Definition
| Parity conditions is what your're expecting |
|
|
Term
|
Definition
US companies must consolidate fin statements. The firm's accounting performance and values, even though historical, are affected by unanticipated changes in exchange rates
ACCOUNTING MEASURES |
|
|
Term
|
Definition
The profitability of trans are afected by unanticipated changes in exchange rates
-formal contract/agreement
-Demon in FX |
|
|
Term
|
Definition
| you cannot hedge economic exposure. CF will be affected |
|
|
Term
|
Definition
Affect CF but flexibility: the PV of the firm's operating CF is affected by changes in exchange rates***your goods and services will cost more
difused->CAN BE HEDGED |
|
|
Term
|
Definition
the asset value of the firm's A/L. Currency exposure
Company with exposure in both resource and product mkts, if can coord activities, b/c of mni knowledge, take advantage of imperfections-->develop flexible operating enfironment |
|
|
Term
| 3 elements of firm's operations that determine Operating CF |
|
Definition
What you'll see+Who you'll see=product decisions
-Production decision =how you'll sell
-financing |
|
|
Term
| Inelastic products (manage op exposure) |
|
Definition
| Gasoline, drugs, IP=protection against FX exchange rates changes. MORE DESIRABLE. Luxury products. Fluid makets. Can push product innovations(RD) in attempt to reduce their product line's elasticity. |
|
|
Term
|
Definition
| substitutes or you don't need it; not food for currency exchange, Dell not sell service, determines exchange rate risk |
|
|
Term
| Managing production decision |
|
Definition
Diversification-diversify to manage production
-more diverse=better
-works over time
DECISIONS
1. fACILITY LOCATION: Can balance out FX exposure.
2. Inputs: Competitive issue=need skilled workers |
|
|
Term
|
Definition
Can be obtained Externally/internally
External: primary security market trans
Internal: profits generated by the comp that are retained and reinvested in the company (across subs) |
|
|
Term
|
Definition
The existence of barries that prevent prices for the same asset in different makrets equilibriating
-cheaper to borrow in own courty and swap
-take advanted of segmented mkts
-use diversification, knowledge from, to tie together subs.
Balane revs with cost: Now product, production and financing in same currency
Reduce political risks: if have domestic constituents (product in US/trading on US exchange) will get more political support
-more tied to local economy, less Foreign-seeming. Using local works in their turf. |
|
|
Term
| Internal capital considerations |
|
Definition
| Capital availability: Shift surplus funds |
|
|
Term
| Can use derivatives to hedge operating exposure |
|
Definition
| HELL NO NOT ENOUGH PRECISION |
|
|
Term
| Does a fixed exchange rate system protect you from operating exposure |
|
Definition
HELL NO= b/c cannot fix real exchange rate to protect. Operating exposure is NOMINAL exposure=20th century.
Do best you can spread things out and be flexible. |
|
|
Term
|
Definition
| A that represent claims on future CF |
|
|
Term
|
Definition
The profitability of transactions are affected by unanticipated changes in exchange rate--pull together derivatives
formal contract/agreement
denom in FX
ex. mortage, tuition. CANT PAY TUITION |
|
|
Term
|
Definition
1. determine contractual currency
2. determine the net trans exposure |
|
|
Term
| Currency determination contract |
|
Definition
Bargaining power: power of parites in contract
Overall efficiency: may be good to bear risk. 3 functionsof money: store ealth, medium exchange, unit of acct price
WHO BETTER ABLE TO BEAR RISK OF UNFORESEEN EXCHANGE RATE MVT? Will one money be more efficient over time? |
|
|
Term
| Most important function money Homo goods |
|
Definition
| Unit of account=price. How much does it cost=where can I get it cheapest? Arbitrage opps= b/t mkts Russia v Canada |
|
|
Term
|
Definition
A currency tat is used in a multinational commodity trading system
USD=VC for oil. Facilitates efficient trade.
NO TRANS EXPSOURE IN COUNTRY OF THE FC. |
|
|
Term
| Most important function money Hetero goods |
|
Definition
Store of value: contract for something and produced over several months=want stability of money
Contract specified in non-VC currecy
-major/minor
-symmetric |
|
|
Term
|
Definition
If both countries would rather have one currency that is more stabloe, more effience. The country of the VC has operating exposure, but no trans exposure.
Want stable currency w/ political stabiity
USD>Congo |
|
|
Term
| Systematic (US imports German goods) |
|
Definition
The IMPORTER can changes sales price=flexibility. Bears exposure but can change price.
One party will face exchange rate exposure (importer)
-can raise price=flexibility
-cost already incurred in $
-if rates go against you, can change in the future
-can't change production cost b/c already done
Whoever bears risk better=importer/gets best deal. |
|
|
Term
|
Definition
| Risk manager determines the total matching long and short positions in contractual currencies and caluculates the net exposure that must be managed! |
|
|
Term
| Fixed exchange rate in a 3rd currency |
|
Definition
| means you're balance. Can do something about gap, but wil blaance cause fixed. |
|
|
Term
| Managers trying to provide diversification via heding operations via conglo |
|
Definition
| HAVE GENERALLY NOT BENEFITED STOCK HOLDERS. 1960's conglos failed except FE |
|
|
Term
| Company shouldn't Diversify |
|
Definition
|
|
Term
| Total risk has effect on SH wealth |
|
Definition
stability of CF: risk of financial distress. Salaried person borrow easier than commission person
Debt capacity: reduce ability to raise cpaital |
|
|
Term
| Firm's CF affect by major price in the 3 |
|
Definition
commodity, interest rates, exchange rate
CANNOT BE DIVERSIFIED AWAY. =role for hedging
Total Risk=hedging=now have instruments to do so=manger's responsibility
Unique risk=diversification
Market risk: determines RRR, responsbility of investors to diversify |
|
|
Term
|
Definition
Weak opinion pound will strengthen on short position: but L forward and buy OTM put option-->if currency strengthen, pt falls and away and hedges. Take a small bet on speculation of uncertianty=OTM Hedge w/ upside
Long position: Weak opinion L will weaken: Sell L oward and buy OTM call option |
|
|
