Chapter 14: Global Financial Management
Study online at https://quizlet.com/_1u00yw
1. Exchange Rate Risk: -The impact of random change in the value of one currency with respect to other
currencies
-risk associated with one currency changing in value relative to another currency
2. Exchange rate risk can be hedged by: using derivative instruments including
-futures
-forward
-options
-swap contracts
3. two kinds of short-term effects of currency movements: 1. transactions risk
2. translations risk
4. long term effects of currency movements: economic risk
5. Transactions Risk: -How short-term changes in exchange rates can affect operating costs and revenues of
firms engaged in international business activities
-arises from the import and export if goods and services
6. Translation Risk: The short-term effects of currency movements on the consolidated accounting statements
of a firm
7. Consolidated Accounting Statements: Are the income statements and balance sheets of a multi-
national corporation and of its all subsidiaries abroad
Are required reporting to home country tax authorities
Are affected by currency translation risks
8. Special Drawing Right (SDR): -A basket of currencies consisting of dollars, euros, pounds, and yen
created by the International Monetary Fund (IMF)
-weighs on the currencies are based on world trading patterns of goods and services
9. Economic Risk: The ways in which long-term exchange rate movements affect firms
10. Hedging: -Is the use of currency derivatives to reduce potential transaction, translation, and economic risks of
currency movements that could lead to losses for a firm or investor
-similar to to insurance contracts where a premium is paid to protect against potential losses
11. Speculators: -is the opposite of hedging
-Trade in currencies and currency derivatives to earn profits and to help to make currency prices efficient
1/5
, Chapter 14: Global Financial Management
Study online at https://quizlet.com/_1u00yw
12. Currency Futures Contracts: -Standardized agreements to buy or sell a specified amount of currency
at a date in the future at a pre-determined price
-buyer agrees to buy or sell a specified amount of currency on a particular at in the future at a pre-determined price
13. Long Position: Buying a currency contract and profiting on the increased value of the underlying currency
over time
14. Short Position: Selling a currency contract and profiting on the decreased value of the currency over time
15. Organized Exchanges: Trade futures contracts in major currencies and offer price transparency and
efficiency
Eliminate counterparty risk due to guaranteed payments on contacts
16. Marked-to-Market: Futures contracts in which gains (losses) are earned (paid) in cash at the end of each
trading day
17. Margin: The small commitment fee needed to purchase a futures contract
18. Margin Call: Losses that cause the contract holder's balance to fall below the maintenance margin at the end
of the trading day thus requiring additional investment in the contract to continue holding the contract
19. Currency Forward Contracts: Are contracts in the currencies of emerging-market countries offered
by large banks in the OTC market
Are less standardized than future contracts such that they can be customized by the seller/counterparty to meet the
hedging needs of the buyer
Are not marked-to-market daily- no liquidity risk
20. Over-the-Counter (OTC) Market: The derivatives market run by large banks
21. Call Option: An investor's right (but not obligation) to buy an asset (e.g., a currency) at a pre-determined
(strike) price
22. Put Option: An investor's right (but not obligation) to sell an asset (e.g., a currency) at a pre-determined price
23. Premium: The price paid by the buyer to the seller for an option contract
24. Currency Swaps: -Allow firms to exchange currencies at a previously agreed exchange rate as a way to
hedge exchange rate movements
-over a period of up to 10 years
25. Plain Vanilla Currency Swap: An interest rate swap, often combined with a currency swap, if the
interest being swapped is in different currencies
2/5
Study online at https://quizlet.com/_1u00yw
1. Exchange Rate Risk: -The impact of random change in the value of one currency with respect to other
currencies
-risk associated with one currency changing in value relative to another currency
2. Exchange rate risk can be hedged by: using derivative instruments including
-futures
-forward
-options
-swap contracts
3. two kinds of short-term effects of currency movements: 1. transactions risk
2. translations risk
4. long term effects of currency movements: economic risk
5. Transactions Risk: -How short-term changes in exchange rates can affect operating costs and revenues of
firms engaged in international business activities
-arises from the import and export if goods and services
6. Translation Risk: The short-term effects of currency movements on the consolidated accounting statements
of a firm
7. Consolidated Accounting Statements: Are the income statements and balance sheets of a multi-
national corporation and of its all subsidiaries abroad
Are required reporting to home country tax authorities
Are affected by currency translation risks
8. Special Drawing Right (SDR): -A basket of currencies consisting of dollars, euros, pounds, and yen
created by the International Monetary Fund (IMF)
-weighs on the currencies are based on world trading patterns of goods and services
9. Economic Risk: The ways in which long-term exchange rate movements affect firms
10. Hedging: -Is the use of currency derivatives to reduce potential transaction, translation, and economic risks of
currency movements that could lead to losses for a firm or investor
-similar to to insurance contracts where a premium is paid to protect against potential losses
11. Speculators: -is the opposite of hedging
-Trade in currencies and currency derivatives to earn profits and to help to make currency prices efficient
1/5
, Chapter 14: Global Financial Management
Study online at https://quizlet.com/_1u00yw
12. Currency Futures Contracts: -Standardized agreements to buy or sell a specified amount of currency
at a date in the future at a pre-determined price
-buyer agrees to buy or sell a specified amount of currency on a particular at in the future at a pre-determined price
13. Long Position: Buying a currency contract and profiting on the increased value of the underlying currency
over time
14. Short Position: Selling a currency contract and profiting on the decreased value of the currency over time
15. Organized Exchanges: Trade futures contracts in major currencies and offer price transparency and
efficiency
Eliminate counterparty risk due to guaranteed payments on contacts
16. Marked-to-Market: Futures contracts in which gains (losses) are earned (paid) in cash at the end of each
trading day
17. Margin: The small commitment fee needed to purchase a futures contract
18. Margin Call: Losses that cause the contract holder's balance to fall below the maintenance margin at the end
of the trading day thus requiring additional investment in the contract to continue holding the contract
19. Currency Forward Contracts: Are contracts in the currencies of emerging-market countries offered
by large banks in the OTC market
Are less standardized than future contracts such that they can be customized by the seller/counterparty to meet the
hedging needs of the buyer
Are not marked-to-market daily- no liquidity risk
20. Over-the-Counter (OTC) Market: The derivatives market run by large banks
21. Call Option: An investor's right (but not obligation) to buy an asset (e.g., a currency) at a pre-determined
(strike) price
22. Put Option: An investor's right (but not obligation) to sell an asset (e.g., a currency) at a pre-determined price
23. Premium: The price paid by the buyer to the seller for an option contract
24. Currency Swaps: -Allow firms to exchange currencies at a previously agreed exchange rate as a way to
hedge exchange rate movements
-over a period of up to 10 years
25. Plain Vanilla Currency Swap: An interest rate swap, often combined with a currency swap, if the
interest being swapped is in different currencies
2/5
