Finance and Derivatives Quiz

International Financial Management

• International financial management is a field focused on using financial principles in a global context.

Purposes of International Financial Management

• Measuring profitability is a critical aspect of managing finances internationally.
• Determining the best investment alternatives is essential for maximizing returns in diverse markets.
• Achieving good career positions often requires knowledge and application of international financial management principles.
• Developing skills for managing personal resources is a crucial skill for managing finances internationally.
• Understanding the world of business practices is essential for navigating international financial environments.
• Identifying trends in achievements is important for gauging progress and adjusting strategies.
• Evaluating the growth potential of a business is crucial for informed investment decisions.
• Assessing overall financial strength is fundamental for making sound international financial decisions.

Special Features of International Financial Management

• Foreign exchange risk is a significant concern in international finance, requiring careful management.
• Political risks associated with international operations can impact business stability and profitability, requiring mitigating strategies.
• Market imperfections in international markets can complicate investment decisions, requiring adaptation and planning.
• Enhanced opportunities exist globally, offering expanded markets and potential for significant returns.

Definition of Exchange Market

• An exchange market is a platform that facilitates the trading of stocks and bonds, providing a secure environment for brokers and traders.
• Investment companies issue shares, attracting investors who seek a portion of the company's capital.
• Governmental oversight plays a key role in regulating this market.

Types of International Financial Exchange Market

• Stocks, bonds, mutual funds, real estate, savings/certificates of deposit, collectibles, and derivatives securities are types of financial instruments traded on international financial markets.
• Money markets trade instruments like mutual funds and certificates of deposit.
• Future and swap contracts, along with commercial paper, CDs, and bankers' acceptances, are financial instruments.

Definition of Stock

• A stock represents an investor's percentage ownership in a company or institution.
• Ownership entitles investors to collect profits based on their proportionate share.
• The value of the stock mirrors the investor's share of the company's capital.

Function of Stock

• Raising capital for business expansion is a core function of issuing stocks.
• Facilitating the growth of businesses through investment and capital allocation is a key function.
• Stocks support wealth redistribution through potential profits.
• Stocks create investment opportunities, particularly for smaller investors.
• Raising capital for development projects is another key benefit of stock issues.

Definition of Bond

• Bonds are long-term debt securities issued by companies and governments.
• They typically come with fixed interest rates and maturities.

Mutual Funds

• Mutual funds are investments collecting money from numerous investors to buy stocks or other assets.

Real Estate

• Real estate involves buying land or buildings with the goal of generating profits through appreciation or rental income.

Savings/Certificates of Deposits

• Certificates of deposit (CDs) are savings accounts offering a fixed interest rate for a defined timeframe.
• Longer terms generally lead to higher interest rates.
• Early withdrawal often incurs substantial penalties.

Collectibles

• Collectibles are unique, rare, or valuable items, including art, trading cards, coins, automobiles, and antiques.

Treasury Bills

• Treasury bills are government-issued short-term debt instruments with fixed maturities.
• They typically have different expiration periods (e.g., 30, 91, 180, or 360 days).
• They do not carry explicit interest rates.
• The return rate is typically closely related to bank interest rates.

Commercial Paper

• Commercial paper are promissory notes issued by large companies with pre-determined maturity periods, varying from one day to 270 days.
• They can be interest-bearing or discounted.

Eurodollar Certificates of Deposits (CDs)

• Eurodollar CDs are foreign-currency-denominated certificates of deposit with maturity periods of 3, 5, or 7 years.
• They provide interest payments in the same currency as the deposit.
• They act as a tool to mitigate foreign exchange risk.

Derivatives Securities

• Derivatives securities derive their value from an underlying asset (e.g., stocks, foreign exchange, commodities, or interest rates).
• Examples include options, forward contracts, and future contracts, as well as swap contracts.
• These tools are frequently used to manage risks for investors and corporations.

Future Contracts

• Future contracts are agreements involving the purchase or sale of assets (like commodities) at a specific future date at an agreed-upon price.
• They are standardized, with terms regulated by stock exchanges.

Forward Contracts

• Forward contracts are agreements to buy or sell at a specific future date based on an agreed-upon price.
• They are typically non-standardized and not traded on exchanges.

Swap Contracts

• Swap contracts are agreements for future exchanges of cash flows or certain assets. Typically based on predefined formulas to determine value.
• Examples include interest rate swaps.

Bankers' Acceptances

• Bankers' acceptances are guarantees by banks, promising payment for a draft according to agreed-upon terms.