AFM131 Study Guide - Final Guide: Canadian Dairy Commission, Export Development Canada, Common External Tariff

1. Which of the following is a reason that training and development are key ingredients to the competitiveness of firms? a) Rapid change e.g. technology, requires employees continually learn new skills b) The new psychological contract has created the expectation that employees invest in their own career development c) Growing reliance on teamwork creates a demand for the ability to solve problems in teams d) Diversity and globalization require that employees be able to work well with people who are different from them e) All of the choices are correct

Due to globalization, companies may have exposure to foreign exchange risk, as unexpected change of exchange rate may affect the settlement of contracts and firm value. Answer the following questions related to foreign currency exposure.

Questions:

(1)List two major differences between transaction exposure and economic exposure.

(2)List two reasons why operational hedging is better than financial hedging in the management of economic exposure.

(3)True or false? “If a company’s revenue and costs/ expenses are in home currency, it does not have any transaction exposure or economic exposure.” Explain.

T/F

11. Interest rate parity states that the percentage difference between the forward and the spot exchange rates is equal to the interest rate differential.

12. According to the Purchasing Power Parity, forward exchange rate adjusts perfectly to inflation

differentials between two countries.

13. Interest rate differential is a good forecaster of the exchange rate in the short run.

14. A currency quote with a forward premium should depreciate because the forward premium is equal to the interest rate differential.

15. In an efficient market, the typical investor could consider as asset price to reflect its true fundamental value at all times.