How do corporate borrowers use interest rate or cross currency swaps to reduce the costs of their debt?
> What is a hedge? How does that differ from speculation?
> Define currency risk.
> Which of the three currency exposures relate to cash flows already contracted for, and which of the exposures do not?
> Ultimately, a treasurer must choose among alternative strategies to manage transaction exposure. Explain the two main decision criteria that must be used.
> Why do many firms object to paying for foreign currency option hedges? Do firms pay for forward contract hedges? How do forwards and options differ if at all?
> Theoretically, shouldn't forward contract hedges and money market hedges have the same identical outcome? Don't they both use the same three specific inputs – the initial spot rate, the domestic cost of funds, and the foreign cost of funds?
> What is the difference between a balance sheet hedge, a financing hedge, and a money market hedge?
> How does a money market hedge differ for an account receivable versus that of an account payable? Is it really a meaningful difference?
> What are the four main contractual instruments used to hedge transaction exposure?
> Lawful expropriation must be accompanied by lawful compensation. What criteria have to be met to fulfill this requirement?
> Why do foreign currency cash balances not cause transaction exposure?
> Which contract is more likely not to be performed, a payment due from a customer in foreign currency (a currency exposure), or a forward contract with a bank to exchange the foreign currency for the firm's domestic currency at a contracted rate (the curr
> Diagram the life span of an exposure arising from selling a product on open account. On the diagram define and show quotation, backlog, and billing exposures.
> Define the three types of foreign exchange exposure.
> When is direct intervention likely to be the most successful? And when is it likely to be the least successful?
> Why do governments and central banks intervene in the foreign exchange markets? If markets are efficient, why not let them determine the value of a currency?
> What is foreign currency intervention? How is it accomplished?
> Explain how technical analysis can be used to forecast future spot exchange rates. How does technical analysis differ from the BOP and asset market approaches to forecasting?
> Explain how the asset market approach can be used to forecast future spot exchange rates. How does the asset market approach differ from the BOP approach to forecasting?
> Which of the three major theoretical approaches seems to put the most weight into arguments on the supply and demand for currency? What is its primary weakness?
> What are the largest contingent currency exposures which arise in the process of pursuing and executing a cross-border acquisition?
> Statistics on a country's balance of payments are used by the business press and business itself often in terms of predicting exchange rates, but the academic profession is highly critical of it. Why?
> Many multinational firms use forecasting services regularly. If forecasting is essentially ‘foretelling the future', and that is theoretically impossible, why would these firms spend money on these services?
> The most widely accepted theory of foreign exchange rate determination is purchasing power parity, yet it has proven to quit poor at forecasting future spot exchange rates. Why?
> Define stabilizing and destabilizing expectations, and describe how they play a role in the long-term determination of exchange rates.
> Explain the meaning of "cross-rate consistency" as used by MNEs. How do MNEs use a check of cross-rate consistency in practice?
> The emerging market crises of 1997-2002 were worsened because of rampant speculation. Do speculators cause such crisis or do they simply respond to market signals of weakness? How can a government manage foreign exchange speculation?
> What is meant by the term “overshooting”? What causes it and how is it corrected?
> What are the major differences between short-term and long-term forecasts for a fixed exchange rate versus a floating exchange rate?
> What was the basis of the Argentine Currency Board, and why did it fail, in 2002?
> What is meant by the term "fundamental equilibrium path" for a currency value? What is "noise"?
> What are the currency risks which arise in the process of making a cross-border acquisition?
> What was the primary disequilibrium at work in Asia in 1997 which likely caused the Asian financial crisis? Do you think it could have been avoided?
> Are capital controls really a method of currency market intervention, or more of a denial of activity? How does this fit with the concept of the impossible trinity?
> What is the downside of both direct and indirect intervention?
> What are the three basic theoretical approaches to exchange rate determination?
> What is an interest rate future? How can they be used to reduce interest rate risk by a borrower?
> Why do borrowers of lower credit quality often find their access limited to floating-rate loans?
> What is sovereign debt? What specific characteristic of sovereign debt constitutes the greatest risk to a sovereign issuer?
> What do the general categories of investment grade and speculative grade represent?
> What is a credit spread? What credit rating changes have the most profound impact on the credit spread paid by corporate borrowers?
> From the point of view of a borrowing corporation, what are credit and repricing risks? Explain steps a company might take to minimize both.
> What are the three stages of a cross-border acquisition? What are the core financial elements integral to each stage?
> What is a credit risk premium?
> How does organized exchange trading in swaps remove any risk that the counterparty in a swap agreement will not complete the agreement?
> Why has LIBOR played such a central role in international business and financial contracts? Why has this been questioned in recent debates over its value reported?
> How does a company cancel or unwind a swap?
> Why are there significantly larger swings in the value of a cross-currency swap than there is in a plain vanilla interest rate swap?
> Why would one company with interest payments due in pounds sterling want to swap those payments for interest payments due in U.S. dollars?
> How can interest rate swaps be used by a multinational firm to manage its debt structure?
> Why do fixed for floating interest rate swaps never swap the credit spread component on a floating rate loan?
> If interest rate swaps are not the cost of government borrowing, what credit quality do they represent?
> What are the primary driving forces that motivate cross-border mergers and acquisitions?
> What is a plain vanilla interest rate swap? Are swaps a significant source of capital for multinational firms?
> How can a business firm that has borrowed on a floating-rate basis use a forward rate agreement to reduce interest rate risk?
> What would be the preferred strategy for a borrower paying interest on a future date if they expected interest rates to rise?
> What is an interest "reference rate" and how is it used to set rates for individual borrowers?
> What are the three different prices or ‘rates' integral to every foreign currency option contract?
> What is the difference between the price of an option, the value of an option, the premium on an option, and the cost of a foreign currency option?
> You read that exchange-traded American call options on pounds sterling having a strike price of 1.460 and a maturity of next March are now quoted at 3.67. What does this mean if you are a potential buyer?
> Explain the difference between foreign currency options and futures and when either might be most appropriately used.
> Define a put and call on the British pound sterling.
> How do foreign currency futures and foreign currency forwards compare?
> What is real option analysis? How is it a better method of making investment decisions than traditional capital budgeting analysis?
> How do you use foreign currency futures to speculate on the exchange rate movements, and what role do long and short positions play in that speculation?
> Many academics and professionals have tested the foreign exchange and interest rate markets to determine their efficiency. What have they concluded?
> Explain the meaning and probable significance for international business of the following contract specifications: a. notional principal b. margin c. marked-to-market
> The term carry trade is used quite frequently in the business press. What does it mean, and what conditions and expectations do investors need to hold to undertake carry trade transactions?
> What is the difference between a historic volatility and an implied volatility?
> Some forecasters believe that foreign exchange markets for the major floating currencies are “efficient” and forward exchange rates are unbiased predictors of future spot exchange rates. What is meant by “unbiased predictor” in terms of how the forward r
> What is the relationship or link between the forward rate and the foreign currency option premium?
> Options are often described as in-the-money, at-the-money, or out-of-the-money. What does that mean and how is it determined?
> An option's value declines over time, but it does not do it evenly. Explain what that means for option valuation.
> The value of an option is stated to be the sum of its intrinsic value and its time value. Explain what is meant by these terms.
> How is expropriation risk factored into the capital budgeting analysis of a foreign project?
> The cash flows associated with a call option on euros by a U.S. dollar based investor occur at different points in time. What are they and how much does the time element matter?
> Once an option has been purchased, only two prices or rates are part of the holder's decision making process. Which two and why?
> Why would anyone write an option, knowing that the gain from receiving the option premium is fixed but the loss if the underlying price goes in the wrong direction can be extremely large?
> What is a foreign currency future?
> How is the price elasticity of demand relevant to exchange rate pass-through?
> What is partial exchange rate pass-through, and how can it occur in efficient global markets?
> Incomplete exchange rate pass-through is one reason that a country’s real effective exchange rate can deviate for lengthy periods from its purchasing power equilibrium level of 100. What is meant by the term exchange rate pass-through?
> What formula is used to convert a nominal effective exchange rate index into a real effective exchange rate index?
> Explain how a nominal effective exchange rate index is constructed.
> According to the theory of purchasing power parity, what should happen to a currency which is undervalued?
> How is foreign exchange risk sensitivity factored into the capital budgeting analysis of a foreign project?
> How close does the Big Mac Index conform to the theoretical requirements for a one price measurement of purchasing power parity?
> Define the two forms of purchasing power parity, absolute and relative.
> If transaction costs for undertaking covered or uncovered interest arbitrage were large, how do you think it would influence arbitrage activity?
> If someone you were working with argued that the current forward rate quoted on a currency pair is the market's expectation of where the future spot rate will end up, what would you say?
> Define uncovered interest arbitrage and explain what expectations an investor or speculator would need to undertake an uncovered interest arbitrage investment?
> Define the terms covered interest arbitrage and uncovered interest arbitrage. What is the difference between these two transactions?
> Define interest rate parity. What is the relationship between interest rate parity and forward rates?
> Define the international Fisher effect. To what extent do empirical tests confirm that the international Fisher effect exists in practice?
> Why is the approximate form of the Fisher effect frequently used instead of the precise formulation? Does this introduce significant analysis error?
> Define the Fisher effect. To what extent do empirical test confirm that the Fisher effect exists in practice?
> What are the differences in the cash flows used in a project point of view analysis and a parent point of view analysis?
> Define the law of one price carefully, noting its fundamental assumptions. Why are these assumptions so difficult to find in the real world in order to apply the theory?
> Define and give an example of each of the following quotes: a. Bid rate quote. b. Ask rate quote.
> With reference to foreign exchange turnover in 2013: a. Rank by volume the relative size of spot, forwards, and swaps. b. List the five most important geographic locations for foreign exchange turnover in descending order. c. List the three most importan
