Jerald Jay C . Catacutan.

Financial Management

BSA-2B. Chapter 9- REVIEW QUESTIONS

1.

 INFLATION - inflation tends to define the value of a currency because holding the currency
results in reduced purchasing power.
 INTEREST RATES- if the interest returns in a particular country are higher relative to other
countries, individuals and companies will be enticed to invest in that country. As a result, there
will be an increased demand for the country's currency.
 BALANCE OF PAYMENTS- is used to refer a system of accounts that catalogs the flow of goods
between the residents of two countries.
 GOVERNMENT INTERVETION- through intervention, the central bank of a country may support
or depress the value of its currency.
 OTHER FACTORS- other factors may affect the exchange rates are political and economic
stability, extended stock market rallies and significant declines in the demand for mahor experts.

2. When a country sells (exports) more goods and services to foreign countries than itpurchases
(imports), it will have a surplus in its balance of trade. Since foreigners areexpected to pay their bills for
the exporter’s goods in the exporter’s currency, the demandfor that currency and its value will go up. A
country's importing and exporting activity can influence its GDP, its exchange rate, and its level of
inflation and interest rates. A rising level of imports and a growing trade deficit can have a negative
effect on a country's exchange rate.A weaker domestic currency stimulates exports and makes imports
more expensive; conversely, a strong domestic currency hampers exports and makes imports cheaper.
Higher inflation can also impact exports by having a direct impact on input costs such as materials and
labor.

3. Currency markets, the spot rate, as in most markets, refers to the immediate exchange rate. The
forward rate, on the other hand, refers to the future exchange rate agreed upon in forward contracts. A
spot foreign exchange rate is the rate of a foreign exchange contract for immediate delivery (usually
within two days). The spot rate represents the price that a buyer expects to pay for foreign currency in
another currency. These contracts are typically used for immediate requirements, such as property
purchases and deposits, deposits on cards, etc. You can buy a spot contract to lock in an exchange rate
through a specific future date. Or, for a modest fee, you can purchase a forward contract to lock in a
future rate. A forward foreign exchange is a contract to purchase or sell a set amount of a foreign
currency at a specified price for settlement at a predetermined future date (closed forward) or within a
range of dates in the future (open forward). Contracts can be used to lock in a currency rate in
anticipation of its increase at some point in the future. The contract is binding for both parties.

4.Translation exposure (also known as translation risk) is the risk that a company's equities, assets,
liabilities, or income will change in value as a result of exchange rate changes.When a firm denominates
a portion of its equities, assets, liabilities, or income in a foreign currency, translation risk occurs.
"Accounting exposure” means the same thing as translation risk. Translation risk can lead to what
appears to be a financial gain or loss that is not a result of a change in assets, but in the current value of
the assets based on exchange rate fluctuations.

5.For multinational companies, political risk refers to the risk that a host country will make political
decisions that prove to have adverse effects on corporate profits or goals. Adverse political actions come
in a range, from events like widespread destruction due to revolution to financial changes like new laws
that prevent the movement of capital.If a company enters an at-risk country, one solution is to purchase
political risk insurance. Buying political risk insurance does not guarantee a company will receive
compensation immediately after an adverse event.

The simplest solution is to research the riskiness of a country, either by paying for reports from
consultants that specialize in making these assessments or doing research yourself using the many free
sources available on the internet (such as the U.S. Department of State's background notes). Then you
will have the more informed option to not set up operations in countries considered political risk hot
spots.

While that strategy can be effective for some companies, sometimes the prospect of entering a riskier
country is so lucrative that it is worth taking a calculated risk. In those cases, companies can sometimes
negotiate terms of compensation with the host country, so there would be a legal basis for recourse if
something happens to disrupt the company's operations.

However, the problem with this solution is that the legal system in the host country may be substantially
different from the company's country, and in some places, foreigners rarely win cases against a host
country. Even worse, a revolution could spawn a new government that does not honor the actions of
the previous government.

6. Libor is used by banks – it is the interest rate at which banks lend to each other in certain London
money markets. (Borrowers, lenders, and investors may use Libor as a reference rate.) Comparatively,
US Prime Rate is used by consumers – it is the rate at which banks lend to their best customers.
(Borrowers, lenders, and investors may use prime rate as a reference rate.) Libor is used primarily by
banks (in theory). Prime is used primarily by consumers. First, Prime interest rates are set by each bank,
are tied to the U.S. Federal Funds Rate, andremain fixed until the Federal Open Market Committee
meets and changes the Federal Funds Rate. Prime is variable, but may remain fixed for a long period of
time. LIBOR is the London interbank offered rate, representing the basic rate of interest used in the
lending between banks on the London interbank market, and the rates are actively traded on the open
market. LIBOR is a short-term variable interest rate and the spread between LIBOR and Prime vary daily,
weekly, and monthly since LIBOR is traded daily and reacts to current market events.

Sources:
https://www.investopedia.com/ask/answers/042315/what-difference-between-forward-rate-and-spot-
rate.asp#:~:text=In%20currency%20markets%2C%20the%20spot,agreed%20upon%20in%20forward
%20contracts.

https://www.quora.com/What-is-the-difference-between-Spot-and-Forward-exchange-rates

https://www.investopedia.com/terms/t/translationexposure.asp#:~:text=Key
%20Takeaways-,Translation%20exposure%20(also%20known%20as%20translation%20risk)%20is%20the
%20risk,foreign%20currency%2C%20translation%20risk%20occurs.

https://focuscfo.com/what-is-the-difference-between-prime-and-libor-rates-bartos/