Podcast
Questions and Answers
If a company based in the Eurozone (EUR) exports goods to the United States and agrees to be paid in USD in 90 days, what type of risk is the company exposed to?
If a company based in the Eurozone (EUR) exports goods to the United States and agrees to be paid in USD in 90 days, what type of risk is the company exposed to?
- Translation exposure, as the USD revenues must be translated back into EUR for accounting purposes.
- Liquidity risk, due to the potential delay in receiving payment.
- Economic exposure, since the company's long-term competitiveness is affected.
- Transaction exposure, because the EUR/USD exchange rate could change before payment is received. (correct)
A UK-based company imports goods from Japan, agreeing to pay in Japanese Yen (JPY) in 60 days. To mitigate the risk of the Yen appreciating against the British Pound (GBP), which strategy would be MOST effective?
A UK-based company imports goods from Japan, agreeing to pay in Japanese Yen (JPY) in 60 days. To mitigate the risk of the Yen appreciating against the British Pound (GBP), which strategy would be MOST effective?
- Taking a long position in GBP/JPY currency futures.
- Selling GBP forward contracts.
- Purchasing JPY call options. (correct)
- Delaying the payment until the last possible day.
Which of the following is NOT a typical role of an underwriter in a share offering?
Which of the following is NOT a typical role of an underwriter in a share offering?
- Guaranteeing the sale of all shares offered to the public.
- Ensuring the company maintains a high stock price post-issuance. (correct)
- Providing advice on the optimal pricing and structure of the offering.
- Marketing the shares to potential investors.
A company is issuing new debentures and enters into a full underwriting agreement. If the public only subscribes for 70% of the issue, what is the underwriter obligated to do?
A company is issuing new debentures and enters into a full underwriting agreement. If the public only subscribes for 70% of the issue, what is the underwriter obligated to do?
Company A, based in the US, reports its financial statements in USD. It has a subsidiary in the UK with financial statements denominated in GBP. What type of exposure arises when Company A consolidates the subsidiary's financial results?
Company A, based in the US, reports its financial statements in USD. It has a subsidiary in the UK with financial statements denominated in GBP. What type of exposure arises when Company A consolidates the subsidiary's financial results?
Which of these scenarios would NOT typically give rise to a foreign exchange gain or loss?
Which of these scenarios would NOT typically give rise to a foreign exchange gain or loss?
What is the primary purpose of underwriting shares or debentures?
What is the primary purpose of underwriting shares or debentures?
A U.S. company has purchased goods from a supplier in Europe for 100,000 euros, payable in 30 days. At the time of purchase, the exchange rate is $1.10 per euro. If, on the payment date, the exchange rate is $1.15 per euro, what is the impact on the U.S. company's financial statements?
A U.S. company has purchased goods from a supplier in Europe for 100,000 euros, payable in 30 days. At the time of purchase, the exchange rate is $1.10 per euro. If, on the payment date, the exchange rate is $1.15 per euro, what is the impact on the U.S. company's financial statements?
Which factor would MOST likely influence the commission charged by an underwriter for a share offering?
Which factor would MOST likely influence the commission charged by an underwriter for a share offering?
How does foreign currency risk management relate to the concept of hedging?
How does foreign currency risk management relate to the concept of hedging?
Flashcards
Foreign Currency
Foreign Currency
Money used in countries other than one's own, such as USD, EUR, or GBP.
Exchange Rate
Exchange Rate
The rate at which one currency can be exchanged for another.
Foreign Exchange Market
Foreign Exchange Market
A global marketplace where different currencies are bought and sold.
Foreign Exchange Gain/Loss
Foreign Exchange Gain/Loss
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Underwriting
Underwriting
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Shares
Shares
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Debentures
Debentures
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Underwriters
Underwriters
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Full Underwriting
Full Underwriting
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Partial Underwriting
Partial Underwriting
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Study Notes
- This is an exam booster video covering foreign currency exchange and accounting, and underwriting of shares and debentures for TYBCOM students.
Foreign Currency
- Foreign currency refers to money used in countries other than one's own, such as USD, EUR, and GBP.
- Businesses use foreign currency for international transactions like importing, exporting, and investing.
Key Concepts in Foreign Currency
- Exchange Rate: The value of one currency expressed in terms of another (e.g., 1 USD = 83 INR).
- Foreign Exchange Market: A global marketplace for buying and selling currencies.
- Foreign Exchange Gain/Loss: Profit or loss resulting from changes in exchange rates when receiving or paying money in a foreign currency.
Forex Transactions in Accounting
- When a company buys goods in a foreign currency but pays later, the actual amount paid may differ due to exchange rate fluctuations.
- Gains or losses from these rate changes are recorded in the company's accounts.
Importance of Foreign Currency
- Facilitates international trade for businesses.
- Currency fluctuations can significantly impact company profits.
- Proper accounting is essential to accurately reflect earnings.
Underwriting of Shares & Debentures
- Underwriting is when financial institutions or individuals agree to purchase a company's shares or debentures if the public does not fully subscribe to them.
- Shares: Units of ownership in a company.
- Debentures: Loans taken by a company from investors, promising to pay interest.
- Underwriters: Entities like banks, financial institutions, or investors guaranteeing the sale of shares/debentures.
- Full Underwriting: Underwriters commit to buying all unsold shares/debentures.
- Partial Underwriting: Underwriters agree to buy only a portion of the unsold shares/debentures.
- Commission for Underwriting: Underwriters receive a fee for the risk of buying unsold shares.
Importance of Underwriting
- Ensures companies can raise necessary funds, even if the public doesn't buy all shares.
- Provides confidence to investors, as experts support the company's issue.
- Helps businesses raise capital without the risk of public subscription failure.
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