ADMS 3595 Chapter Notes - Chapter 16: Financial Instrument, Underlying, Market Risk

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raspberrymouse643

10 Mar 2018

School

York University

Department

Administrative Studies

Course

ADMS 3595

Professor

Sung Kwon

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Document Summary

Indirect cost: direct cost direct transaction cost (bank service / brokerage/ insurance premiums) Liquidity risk entity encounter difficulty in meeting obligations of financial liabilities: market risk, currency risk fv/future cash flow of instrument fluctuate due to changes in foreign exchange rates. Interest rate risk same as ^ but fluctuation in market interest rates: other price risk same as above^ but changes in market price caused by other issues. Mcdonalds: arbitrageur take advantage of inefficiencies in different markets. Ifrs: considers whether contracts have net settlement features, settled on net basis by paying cash/assets, opposed to taking delivery of product. If net settlement exists designated as (cid:862)expected use(cid:863: not accounted as derivatives. Illustration 16-2 p. 979: written option riskier for company, company obligated to perform (no control, purchased gives company right but not obligated to do something. Journal entry p. 980: option premium composed of 2 amounts. Intrinsic value: time value, formula p. 980.

Related Questions

Compute the expected return of a portfolio given these three economic states, their likelihoods, and the potential returns:

Economic State Probability Return

Fast Growth 20.00% 30.00%

Slow Growth 50.00% 6.00%

Recession 30.00% -2.00%

Answer

		8.40%
		11.33%
		12.65%
		15.47%

Compute the standard deviation of a portfolio given these three economic states, their likelihoods, and the potential returns:

Economic State Probability Return

Fast Growth 20.00% 30.00%

Slow Growth 50.00% 6.00%

Recession 30.00% -2.00%

Answer

1.28%

4.36%

7.82%

11.34%

Year-to-date, Company O had earned -2.10% return. During the same time period Company V earned 8.00% and Company M earned 6.25%. If you have a portfolio made up of 40.00% Company O, 30.00% Company V, and 30.00% Company M, what is the overall portfolio return?

Answer

5.778%

4.270%

6.871%

3.435%

Risk that CAN BE eliminated through proper diversification is called _____.

Answer

		market risk
		firm-specific risk
		systematic risk
		non-diversifiable risk

GIVEN: Spot Rate: 1 X = 1.02 Y
30 Day Forward Rate: 1 X = 1.15 Y
Your currency is "X" and you will be paying 345Y. You would ____ because _____.

Answer

		pay now; of the irrelevance of payment time
		pay now; it will take less "X"
		pay in 30 days; it will take less "X"

The amount of one currency needed to purchase one unit of another currency is the _____.

Answer

		derivative rate
		exchange rate
		backwardation rate
		over-the-counter rate

The price of an option is called a(n) _____.

Answer

		expiration cost
		holding cost
		premium
		proceeds

When a futures contract expires, the parties usually _____.

Answer

		have a party when losses are low
		take delivery of the contract asset
		do a cash settlement
		swap off liabilities.

When a forward contract expires, the parties will _____.

Answer

		have a party when losses are low
		deliver the contract asset
		do a cash settlement
		swap off liabilities.

Any asset whose value is derived from the value of some underlying asset is a(n) ____.

Answer

		derivative
		primary capital
		spot asset
		intermediary asset

Which of the following is not traded on an exchange?

Answer

		options
		futures
		forwards
		they are all exchange-traded

A system under which a country's exchange rates are tied to another currency by government policy is _____.

Answer

		floating exchange rates
		pegged exchange rates
		convertible exchange rates
		forward rates

One of the _______ for business with a floating exchange rate system is the _______ planning business activities in an international market.

Answer

		disadvantages; difficulty of
		advantages; easiness of
		irrelevant situations; normal
		none of the above

U.S. dollars deposited in foreign banks are called _____ and interest paid on these deposits is normally tied to _____.

Answer

		non-foreign deposits; FED funds rate
		indirect dollars; Discount Funds Rate
		Eurodollars; LIBOR
		none of the above

____ is a disadvantage of the gold standard.

Answer

		Excess currency slowing economic growth
		Excess inflation
		A non-variable beta
		Lack of currency to promote continued economic expansion

A monetary system in which paper money can be converted directly to gold is a(n) ___.

Answer

		dollar backed float
		gold standard
		currency float
		Americanized gold standard
		none of the above

Reason(s) for the Great Depression following the Great War include:

Answer

		trade protectionism
		isolationism
		nationalism
		all of the above
		none of the above

An agreement between the WW II allies in 1944 designed to prevent the problems leading to the Great Depression and WW II and to rebuild Asia and Europe was the _____.

Answer

		Armistice of 1945
		Bretton Woods Agreement
		Lend Lease Act for Asia and Europe
		none of the above

A derivative is used to ____ thereby _____.

Answer

		float; gaining excess currency for expansion
		peg currency; improving trade with a primary partner
		hedge; reducing/eliminating risk
		none of the above

Easier business planning is an advantage of the ______ system.

Answer

		mixed exchange rate
		floating exchange rate
		derivative exchange rate
		gold standard
		none of the above

____ is the chance that some unfavorable event will occur.

Answer

		Expected return
		Risk
		Coefficient of variation
		Correlation

raspberrycicada573

Compute the expected return of a portfolio given these three economic states, their likelihoods, and the potential returns:

Economic State Probability Return

Fast Growth 20.00% 30.00%

Slow Growth 50.00% 6.00%

Recession 30.00% -2.00%

Answer

		8.40%
		11.33%
		12.65%
		15.47%

Compute the standard deviation of a portfolio given these three economic states, their likelihoods, and the potential returns:

Economic State Probability Return

Fast Growth 20.00% 30.00%

Slow Growth 50.00% 6.00%

Recession 30.00% -2.00%

Answer

		1.28%
		4.36%
		7.82%
		11.34%

Year-to-date, Company O had earned -2.10% return. During the same time period Company V earned 8.00% and Company M earned 6.25%. If you have a portfolio made up of 40.00% Company O, 30.00% Company V, and 30.00% Company M, what is the overall portfolio return?

Answer

		5.778%
		4.270%
		6.871%
		3.435%

Risk that CAN BE eliminated through proper diversification is called _____.

Answer

		market risk
		firm-specific risk
		systematic risk
		non-diversifiable risk

GIVEN: Spot Rate: 1 X = 1.02 Y
30 Day Forward Rate: 1 X = 1.15 Y
Your currency is "X" and you will be paying 345Y. You would ____ because _____.

Answer

		pay now; of the irrelevance of payment time
		pay now; it will take less "X"
		pay in 30 days; it will take less "X"

The amount of one currency needed to purchase one unit of another currency is the _____.

Answer

		derivative rate
		exchange rate
		backwardation rate
		over-the-counter rate

The price of an option is called a(n) _____.

Answer

		expiration cost
		holding cost
		premium
		proceeds

When a futures contract expires, the parties usually _____.

Answer

		have a party when losses are low
		take delivery of the contract asset
		do a cash settlement
		swap off liabilities.

When a forward contract expires, the parties will _____.

Answer

		have a party when losses are low
		deliver the contract asset
		do a cash settlement
		swap off liabilities.

Any asset whose value is derived from the value of some underlying asset is a(n) ____.

Answer

		derivative
		primary capital
		spot asset
		intermediary asset

Which of the following is not traded on an exchange?

Answer

		options
		futures
		forwards
		they are all exchange-traded

A system under which a country's exchange rates are tied to another currency by government policy is _____.

Answer

		floating exchange rates
		pegged exchange rates
		convertible exchange rates
		forward rates

One of the _______ for business with a floating exchange rate system is the _______ planning business activities in an international market.

Answer

		disadvantages; difficulty of
		advantages; easiness of
		irrelevant situations; normal
		none of the above

U.S. dollars deposited in foreign banks are called _____ and interest paid on these deposits is normally tied to _____.

Answer

		non-foreign deposits; FED funds rate
		indirect dollars; Discount Funds Rate
		Eurodollars; LIBOR
		none of the above

____ is a disadvantage of the gold standard.

Answer

		Excess currency slowing economic growth
		Excess inflation
		A non-variable beta
		Lack of currency to promote continued economic expansion

A monetary system in which paper money can be converted directly to gold is a(n) ___.

Answer

		dollar backed float
		gold standard
		currency float
		Americanized gold standard
		none of the above

Reason(s) for the Great Depression following the Great War include:

Answer

		trade protectionism
		isolationism
		nationalism
		all of the above
		none of the above

An agreement between the WW II allies in 1944 designed to prevent the problems leading to the Great Depression and WW II and to rebuild Asia and Europe was the _____.

Answer

		Armistice of 1945
		Bretton Woods Agreement
		Lend Lease Act for Asia and Europe
		none of the above

A derivative is used to ____ thereby _____.

Answer

		float; gaining excess currency for expansion
		peg currency; improving trade with a primary partner
		hedge; reducing/eliminating risk
		none of the above

Easier business planning is an advantage of the ______ system.

Answer

		mixed exchange rate
		floating exchange rate
		derivative exchange rate
		gold standard
		none of the above

____ is the chance that some unfavorable event will occur.

Answer

		Expected return
		Risk
		Coefficient of variation
		Correlation

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ADMS 3595 Chapter Notes - Chapter 16: Financial Instrument, Underlying, Market Risk

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