Wk3 Tutorial Solutions

Wk3 Tutorial Solutions - Kirt C. Butler, Solutions for...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Kirt C. Butler, Solutions for Multinational Finance , 4 th edition 4 Chapter 3 Foreign Exchange and Currency Risk Management Answers to Conceptual Questions 3.1 Define liquidity. Liquidity: the ease with which you can exchange an asset for another asset of equal value. 3.2 What is the difference between a money market and a capital market? Money markets are markets for financial assets and liabilities of short maturity, usually considered to be less than one year. Capital markets are markets for financial assets and liabilities with maturities greater than one year. 3.3 What is the difference between an internal and an external market? Debt placed in an internal market is denominated in the currency of a host country and placed within that country. Debt placed in an external market is placed outside the borders of the country issuing the currency. 3.4 What is the Eurocurrency market and what is its function? The Eurocurrency market is an external credit market in bank deposits and loans. Like a national credit market, the Eurocurrency market permits the transfer of value over time in a given currency. 3.5 In what way is the Eurocurrency market different from an internal credit market? There are typically no reserve requirements, interest rate regulations or caps, withholding taxes, deposit insurance requirements, or regulations influencing credit allocation decisions. There are also less stringent disclosure requirements. 3.6 What is the London Interbank Offer Rate (LIBOR)? LIBOR is the rate at which a Euromarket bank offers to make a loan to another Euromarket bank. 3.7 What effect did the Basle Accord have on international banks? The Basle Accord imposed minimum capital adequacy requirements on international banks as a protection against the credit risk of the banks’ loan portfolios. The Basle Accord also encouraged the use of value-at-risk (VaR) measures to quantify the risk of losses greater than a certain amount over a given time period. 3.8 What is the difference between spot and forward markets for foreign exchange? In the spot market, trades are for immediate delivery. In the forward market, trades are for future delivery according to an agreed-upon delivery date, exchange rate, and amount. 3.9 What is Rule # 1 when dealing with foreign exchange? Why is it important? Rule # 1 says to “Keep track of your currency units.” It is important because foreign exchange prices have a currency in both the numerator and the denominator. Most prices (for instance, a $15,000/car price on a new car) have a non-currency asset in the denominator and a currency in the numerator. 3.10 What is Rule # 2 when dealing with foreign exchange? Why is it important? Rule
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 9

Wk3 Tutorial Solutions - Kirt C. Butler, Solutions for...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online