What are the seven most common political risk mitigation strategies employed by multinational enterprises?
> Firms located in illiquid and segmented emerging markets would benefit from nationalizing their own cost of capital. What do they need to do, and what conditions must exist for their efforts to succeed?
> What is the effect of market liquidity and segmentation on a firm's cost of capital?
> What is market segmentation, and what are the six main causes of market segmentation?
> What is meant by the term market liquidity? What are the main disadvantages for a firm to be located in an illiquid market?
> What are the most common challenges a firm resident in a segmented market faces in regards to its access to capital?
> Answer the following questions about OPIC: a. What is OPIC? b. What types of political risks can OPIC insure against?
> The key to managing operating exposure at the strategic level is for management to recognize a disequilibrium in parity conditions when it occurs and to be pre-positioned to react most appropriately. How can this task best be accomplished?
> The objective of both operating and transaction exposure management is to anticipate and influence the effect of unexpected changes in exchange rates on a firm's future cash flows. What strategic alternative policies exist to enable management to manage
> Explain how the concept of macroeconomic uncertainty expands the scope of analyzing operating exposure.
> According to financial theory, which is more important to the value of the firm, financing or operating cash flows?
> What are examples of static exposures versus dynamic exposures?
> Explain the time horizons used to analyze and measure unexpected changes in exchange rates.
> Why do unexpected exchange rate changes contribute to operating exposure, but expected exchange rate changes do not?
> Why do many firms only allow hedging of booked exposures, and not quotation or backlog exposures?
> What do you see as the primary difference between operating exposure and translation exposure? Would this have the same meaning to a private firm as a publicly traded firm?
> According to surveys of corporate practices, which currency exposures do most firms regularly hedge?
> What is investment insurance, and what organizations provide such coverage?
> What are the main differences between losses from transaction exposure and translation exposure?
> What is hyperinflation and what are the consequences for translating foreign financial statements in countries experiencing hyperinflation?
> How do some firms attempt to hedge their long-term operation exposure with contractual hedges? What assumptions do they make in order to justify contractual hedging of their operating exposure? How effective is such contractual hedging in your opinion?
> Explain how currency swaps can hedge foreign exchange operating exposure. What are the accounting advantages of currency swaps?
> Explain how back-to-back loans can hedge foreign exchange operating exposure. Would firms have any specific worries about their partner in a back-to-back loan arrangement?
> An alternative arrangement for managing operating exposure between firms with a continuing buyer-supplier relationship is risk sharing. Explain how risk sharing works.
> Explain how matching currency cash flows can offset operating exposure.
> Operating exposures can be partially managed by adopting operating or financing policies that offset anticipated foreign exchange exposures. What are four of the most commonly employed proactive policies?
> How can a multinational firm diversify operations? How can it diversify its financing? Do you believe these are effective ways of managing operating exposure?
> Define operating exposure, economic exposure, and competitive exposure. Can you provide any insights into what may be behind the use of the different terms?
> An international investment agreement spells out specific rights and responsibilities of both the foreign firm and the host government. What are the main financial policies that should be included in an investment agreement?
> What are the major differences in translating assets between the current rate method and the temporal method?
> One of the major differences between translation methods is which balance sheet components are translated at which exchange rates, current or historical. Why would accounting practices ever use historical exchange rates?
> What are the two basic methods for translation used globally?
> Can or should a company change the functional currency designation of a foreign subsidiary from year to year? If so, when would it be justified?
> What is a functional currency? What do you think a "non-functional currency" would be?
> What is the difference between a self-sustaining foreign subsidiary and an integrated foreign subsidiary?
> In the context of preparing consolidated financial statements, are the words translate and convert synonyms?
> What activity gives rise to translation exposure?
> How does translation alter the global tax liabilities of a firm? If a multinational firm's consolidated earnings increase as a result of consolidation and translation, what is the impact on tax liabilities?
> When would a multinational firm, if ever, realize and recognize the cumulative translation losses recorded over time associated with a subsidiary?
> Have studies found that more or less government involvement in a prospective project is helpful in the success of the business?
> When is a balance sheet hedge justified?
> If a U.S.-based multinational company generates more than 80% of its profits (earnings) outside the U.S. in the euro zone and Japan, and both the euro and the yen fall significantly in value versus the dollar as occurred in the second half of 2014, is th
> What are the primary options firms have to manage translation exposure?
> Where do you believe that most company's would prefer currency translation imbalances or adjustments to go, to earnings or consolidated equity? Why?
> What are the major differences in translating liabilities between the current rate method and the temporal method?
> What does the word translation mean? Why is translation exposure called an accounting exposure?
> What are the four main types of transactions from which transaction exposure arises?
> Describe six arguments against a firm pursuing an active currency risk management program?
> Describe four arguments in favor of a firm pursuing an active currency risk management program?
> How does currency hedging theoretically change the expected cash flows of the firm?
> Capital budgeting for a foreign project is considerably more complex than the domestic case. What are the factors that add complexity?
> What – according to financial theory – is the value of a firm?
> 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?
