Question 1Explain the differences between the following types of foreign exchange exposure and provide anexample of each to demonstrate how the foreign exchange risk will impact in each example.(a) transaction exposure(b) translation exposure(c) economic exposureHint: Be sure to refer to the following reading:Jeff Madura, (2014) "International Financial Management", Cengage Learning US, Chapter 10"Measuring exposure to exchange rate fluctuations"Question 2Explain the concept of foreign exchange risk and discuss how foreign exchange risk may impact acorporate’s free cash flow and its profit & Loss statement and Balance Sheet financial statements.Hint: be sure to refer to the following reading:Michael Papaioannou (2006) “Exchange Rate Risk Measurement and Management: Issues andApproaches for Firms”, IMF Working Paper, WP/06/255, November 2006Question 3Recommend alternative internal hedging approaches that a company can be used to reduce itsexposure to transaction and translation risk.Question 4Identify and discuss the relative strengths and weaknesses of alternative approaches to managingforeign exchange risk. In your answer be sure to identify and discuss both internal and externalapproaches.Question 5Explain the concept of a money market hedge and discuss how such a hedge can be used to manageaccounts payable and recievable in foreign currencies.Question 6Differentiate between interest rate parity and purchasing power parity. With the use of examples,show how both can be used to estimate implied forward rates for foreign exchange.
Question 1What is liquidity risk?Question 2Answer each of the following questions(a) What are the primary reasons why liquidity risk arises?(b) How does liquidity risk arising from the liability side of the balance sheet differ fromliquidity risk arising from the asset side of the balance sheet?Question 3Differentiate between market (or transactional) liquidity and funding (or liability) liquidityrisk.Question 4Refer to the Reading by Erik Banks.Identify and explain why various types of off balance sheet activities can result in liquidityrisk?Question 5Differentiate between the primary sources of liquidity risk for a bank as opposed to acorporate.
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