FIN4604 Exam 2
_____________________ refers to the traditional policy of pushing the value of their down to maintain export price competitiveness.
"Beggar-thy-neighbor"
Overshooting
A behavior in financial markets in which a major market adjustment in price changes surpasses the likely value it will settle at after a longer adjustment period. A market movement akin to an "overreaction."
Contractual hedge
A foreign currency hedging agreement or contract, typically using a financial derivative such as a forward contract or foreign currency option.
Borrowing exposure
A form of transaction exposure that arises when funds are borrowed or loaned, and the amount involved is denominated in a foreign currency.
Black market
An illegal foreign exchange market.
The ___________ Approach, also known as the relative price of bonds or portfolio balance approach, suggests that exchange rates are determined by the supply and demand for financial assets.
Asset Market
___________ is the main technique used to minimize translation exposure.
Balance sheet hedge
___________ controls involve the restriction of access to foreign currency by the government.
Capital controls
These technical analysts are traditionally referred to as _________ in technical analysis.
Chartists
___________ intervention involves multiple major countries or a collective like the G8 agreeing that a specific currency's value is out of alignment with their collective interests.
Coordinated
Hyperinflation countries
Countries with a very high rate of inflation.
Many firms operating within the Far Eastern business environments were largely controlled either by families or by groups related to the governing party or body of the country. This tendency means that the interests of minority stockholders and creditors are often secondary at best to the primary motivations of corporate management.
Cronyism
An entry in a translated balance sheet in which gains and/or losses from translation have been accumulated over a period of years.
Cumulative translation adjustment (CTA) account
A method of translating the financial statements of foreign subsidiaries into the parent's reporting currency. All assets and liabilities are translated at the current exchange rate with few exceptions.
Current rate method
___________ intervention involves the active buying and selling of the domestic currency against foreign currencies.
Direct
Under United States code ____________, these are defined as countries where the cumulative three-year inflation amounts to 100% or more.
FASB 52
___________ refers to any activity or policy initiative by a government or central bank to change a currency value on the open market.
Foreign currency intervention
Any distinct or separable business that prepares its financial statements in any currency other than the reporting currency of the parent company. Foreign entity
Foreign entity
___________ is a measure of the potential for a firm's profitability, net cash flow, and market value to change due to a change in exchange rates.
Foreign exchange exposure
Option hedges
Foreign exchange transaction exposure can be managed by hedges. Some of these hedges employ call and put options.
Contractual hedges, also called financial hedges
Foreign exchange transaction exposure can be managed by hedges. Some of these hedges employ forward, money, futures, and options markets.
Operating hedges
Foreign exchange transaction exposure can be managed by hedges. Some of these hedges utilize operating cash flows—cash flows originating from the operating activities of the firm—and include risk-sharing agreements and payments strategies using leads and lags.
Functional currency This is the currency of the primary economic environment in which a distinct entity operates. This currency of a foreign entity may or may not be the same as the currency of the country of operation.
Functional currency
Purchasing a contract (including forward foreign exchange) or tangible good that will rise in value and offset a drop in value of another contract or tangible good. They are undertaken to reduce risk by protecting an owner from loss.
Hedging
The ___________ Approach states that the exchange rate is determined by the supply and demand for national monetary stocks.
Monetary
A method of translating the financial statements of foreign subsidiaries into the parent's reporting currency. All monetary accounts are translated at the current rate, and all nonmonetary accounts are translated at their historical rates.
Monetary/nonmonetary method
The Monetary Approach focuses primarily on the role of ____________.
Money stocks
The Balance of Payments Approach is another frequently used theoretical approach to exchange rate determination, following _________.
PPP.
This is the process for preparing the financial statements if a foreign entity's functional currency is the reporting currency (the currency of the parent company used for consolidated reporting purposes).
Remeasurement
identify its goals, choose which hedges it wishes to use, and decide what proportion of the currency exposure should be hedged
Risk management in practice requires a firm's treasury to...
If the foreign subsidiary operates completely separately from the parent company (e.g., a company acquired by the parent company in a different business than the parent company, with little intracompany transactions), it is classified as a
Self-sustaining foreign entity (distinct or separable operation)
___________ analysis involves studying past price behavior to gain insights into future price movements.
Technical analysis
Teaquila effect
Term used to describe how the Mexican peso crisis of December 1994 quickly spread to other Latin American currency and equity markets through the contagion effect.
The countries of Turkey, South Africa, India, Indonesia, and Brazil are known as:
The Fragile Five
The Plaza Agreement which is an example of coordinated intervention In September 1985, an agreement was signed at the Plaza Hotel in New York City by the members of the Group of Ten. The members, collectively, had concluded that currency values had become too volatile or too extreme in movement for sound economic policy management. This agreement is known as:
The Plaza Agreement which is an example of coordinated intervention
currency risk tolerance and its expectations of the movement of exchange rates over the transaction exposure period
The choice of which hedge to use depends on the individual firm's ...
Backlog exposure
The period of time between contract initiation and fulfillment through delivery of services or shipping of goods.
Quotation exposure
The period of time in which a seller has quoted a fixed price in a foreign currency to a potential buyer, but the buyer has yet to agree.
Operating or economic exposure
The potential for a change in expected cash flows, and thus in value, of a foreign subsidiary as a result of an unexpected change in exchange rates.
Transaction exposure
The potential for a change in the value of outstanding financial obligations entered into prior to a change in exchange rates but not due to be settled until after the exchange rates change.
Translation exposure or Accounting exposure
The potential for an accounting-derived change in owners' equity resulting from exchange rate changes and the need to restate financial statements of foreign subsidiaries in the single currency of the parent corporation.
Contagion
The spread of a crisis in one country to its neighboring countries and other countries with similar characteristics—at least in the eyes of cross-border investors.
Billing exposure
The time it takes to get paid in cash after the issuance of an account receivable (A/R).
Forward hedge
The use of a forward exchange contract to hedge or protect the value of a foreign currency denominated transaction.
Money market hedge
The use of foreign currency borrowing to reduce transaction or accounting foreign exchange exposure.
Natural hedge
The use or existence of an offsetting or matching cash flow from firm operating activities to hedge a currency exposure.
Currency risk
The variance in expected cash flows arising from unexpected changes in exchange rates.
Financial hedges
These types of hedges utilize financing cash flows—cash flows originating from the financing activities of the firm—and include specific types of debt and foreign currency derivatives, such as swaps
This is the process for preparation of the financial statements if a foreign entity's financial statements are maintained in a functional currency, and that functional currency is different from the reporting currency of the parent company.
Translation
Currency manipulation
a protracted large-scale intervention in one direction in the exchange market should be avoided.
According to the Monetary Approach, both domestic and foreign ______ are viewed as perfect substitutes.
bonds
In the Monetary Approach, other financial assets such as ____ are not considered relevant for exchange rate determination.
bonds
Direct intervention involves the central bank ___________ its own currency.
buying or selling
In direct intervention, the ___________________ acts like any other trader in the currency market.
central bank
In the 1970s, the world's currency markets grew so large that even a ___________ might not have sufficient resources to move the market.
central bank
Central banks exercise caution in the degree of direct intervention to avoid potentially ___________ their monetary supplies.
changing
In coordinated intervention, countries work __________________ to push a currency's value in a desired direction
collectively
Governments often restrict access to foreign currencies to ___________ trade, such as purchasing imports.
commercial
Exchange rate flows in the Balance of Payments Approach reflect ___________ and __________ transactions.
current account, financial account
The United States differentiates foreign subsidiaries based on functional currency. If the financial statements of the foreign subsidiary are maintained in the local currency and the local currency is the functional currency, then they are translated using the ___________________ method.
current rate
Exchange rate movements can be categorized into three time horizons: (1) ______________ movements, which is seemingly random; (2) _____________ movements, ranging from several days to several months; and (3) _________________ movements characterized by up and down long-term trends.
day-to-day short-term long-term
According to the theory of purchasing power parity (PPP), the long-run equilibrium exchange rate is determined by the ratio of ___________ relative to foreign prices.
domestic prices
Capital controls limit the ability to exchange ___________ currency for ___________ currency.
domestic, foreign
A balance sheet hedge requires an __________________ of exposed foreign currency assets and liabilities on a firm's consolidated balance sheet.
equal amount
According to the basic version of the Balance of Payments Approach, the _____________________________ is achieved when the ________________________ of foreign exchange from current account activities matches the _______________________________ of foreign exchange from financial account activities
equilibrium exchange rate, inflow (or outflow), net outflow (or inflow).
Alterations in expected returns and relative risks of financial assets subsequently impact ___________.
exchange rates.
Despite its historical use, the policy of "beggar-thy-neighbor" has not ___________.
fallen out of fashion.
Recent research has suggested the existence of long-term "waves" in currency movements under ___________ exchange rates.
floating
The primary assumption of technical analysis is that exchange rates and market-driven prices ___________.
follow trends.
The United States differentiates foreign subsidiaries based on functional currency. If the financial statements of foreign subsidiaries are maintained the local currency and neither the local currency nor the U.S. dollar is the functional currency, then the statements must first be remeasured into the _______________ currency by the _______________________ and then translated into ________ using the ________________ method
functional, temporal method, dollars, current rate
In technical analysis, past price behavior, such as trends and formations of price movements, is studied to analyze _____________________________.
future price movements.
In recent years, some governments like the United States and the European Union have strived to ___________.
hold their currency values down.
This is a characterization of the relationship of the foreign subsidiary with that of the parent company. If the foreign subsidiary operates as an extension of the parent company's operations (e.g., a foreign distributor of the parent company's products—products manufactured by the parent company at home), it is classified as an
integrated foreign entity
Indirect intervention in foreign currency intervention involves the central bank changing ___________ in order to change the attractiveness of domestic currency obligations for foreign investors.
interest rates
The temporal method assumes that certain line item assets, such as _____________________________ , are regularly restated to reflect market value.
inventory and net plant and equipment
Capital controls typically prohibit or limit access to foreign currencies for ___________ purposes, particularly for short-term portfolios.
investment
The objective of managing foreign exchange exposure is to....
maximize the profitability, net cash flow, and market value of the firm.
Changes in ___________ and ___________ policy influence the expected returns and perceived relative risks of financial assets in the Asset Market Approach.
monetary and fiscal policy
According to the Monetary Approach, the exchange rate is influenced by the expected future levels and rates of growth of ___________.
monetary stocks.
If assets and liabilities are carried at historical cost instead of being restated, the temporal method becomes the ___________ method of translation.
monetary/nonmonetary
In capital controls, trading with foreign currency can only take place with ...
official designees of the government or central bank.
PPP is the ________ and most widely followed of the exchange rate theories.
oldest
A change in exchange rates will affect the value of exposed liabilities in a direction ___________ to the change in value of exposed assets.
opposite
Coordinated intervention occurs when countries believe that a specific currency's value is ___of alignment with their collective interests.
out
Chartist analysts focus on ___________ data to determine past trends that are expected to continue into the future.
price and volume
If the goal of direct intervention is to increase the value of the domestic currency, the central bank would ___________ its own currency using foreign exchange reserves.
purchase
Competitive devaluations have been a result of countries pursuing policies to ___________.
push the value of their currencies down.
Relative Purchasing Power Parity suggests that changes in ___________ between countries drive the change in exchange rates over time.
relative prices
If the goal of direct intervention is to decrease the value of the domestic currency, the central bank would ___________ its own currency in exchange for foreign currency.
sell
The objective of technical analysis is to analyze and project trends to predict _____-term and _______-term price movements in the future.
short, medium
According to the Asset Market Approach, shifts in the _____________________ for widely varied financial assets alter exchange rates.
supply and demand
The Balance of Payments Approach considers the ___________ and __________ for currencies in the foreign exchange market.
supply, demand
The United States differentiates foreign subsidiaries based on functional currency. If the financial statements of the foreign subsidiary are maintained in the local currency and the U.S. dollar is the functional currency, then they are remeasured using the ___________ method
temporal
The _____________ method is a translation method used in the United States that is essentially similar to the monetary/nonmonetary method.
temporal
The Parity Conditions Approach is based on the following theories:
the Law of One Price Absolute Purchasing Power Parity Relative Purchasing Power Parity Interest Rate Parity
The most important element of a chartist's work is the belief that future exchange rates are based on ___________.
the current exchange rate.
This is the currency that the reporting entity uses to prepare its financial statements and for consolidated reporting.
the reporting currency
Under the temporal method, specific assets and liabilities are ________________ at exchange rates consistent with the timing of those items' creation.
translated
The United States differentiates foreign subsidiaries based on functional currency. If the financial statements of the foreign subsidiary of a U.S. company are maintained in U.S. dollars, then
translation is not required
If a balance sheet hedge is successfully implemented for each foreign currency, the net translation exposure will be ___________.
zero.
