Review Set 1(1) - Review Set 1 FIN320-6 9 Winter 2011...

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Review Set 1 -- FIN320-6, 9 Winter 2011 Thought Questions 1. You may have heard a radio advertisement of some investment strategy that offers a high return with little or no risk. Based upon our discussion of the risk-return tradeoff including the concepts of required and expected return, how would you characterize these claims? Explain. 2. A U.S. importer buys a product that has no close substitutes and is grown only in South Africa. The importer must pay in the South African Rand and the price of the product in South African Rand is determined at the time of order which occurs several months before delivery. Payment will occur at the time of delivery. The importer must decide whether to hedge foreign exchange rate risk by entering a forward contract. The importer faces a lot of competition from other U. S. importers of the same good. What happens if the importer decides to hedge with a forward contract and the U.S. $ depreciates relative to the South African Rand and none of his competitors hedge with a forward contract? What happens if the importer decides to hedge with a forward contract and the U.S. $ depreciates relative to the South African Rand and each of his competitors hedge with a forward contract? What happens if the importer decides to hedge with a forward contract and the U.S. $ appreciates relative to the South African Rand and none of his competitors hedge with a forward contract? What happens if the importer decides to hedge with a forward contract and the U.S. $ appreciates relative to the South African Rand and each of his competitors hedge with a forward contract? If none of your competitors are hedging do you decrease or increase your risk by hedging? (This is a tough question, but try to think it through and write something down, I will not select this question to be graded.) Other Review Questions 1. Differentiate among the types of business organizations and describe the advantages of the corporate form of business. 2. Differentiate between primary and secondary markets.
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Review Set 1(1) - Review Set 1 FIN320-6 9 Winter 2011...

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