2008/05/05 22:14,
Just for remembering these answers so that I typed them out.
1. Give a general definition of "foreign exchange exposure" as it relates to the operations of a multinational enterprise.
In its general sense, foreign exposure is the possibilities of either beneficial or harmful effects on companies caused by the change in foreign exchange rates. The effect on the company may be on its cash flows, its profits, or its market value.
2. Explain the differences among the transaction, operation and translating exposure.
Transaction exposure is the potential gain or loss in contracted-for near term cash flows caused by a foreign exchange rate induced change in the value of amounts due to MNE or amount MNE owes to other parties. As such, it is a change in the home currency value of cash flows that are already contracted for.
Operating exposure is the potential for a change in the value of MNE, usually viewed as the present value of all cashinflows, caused by unexpected exchange rate changes. As such, it is a change in expected long-term cash flows; i.e., future cash flow expected in the cause of normal business but not yet contracted for.
Translation exposure is the possibility of change in the entity section(common stock, retained earnings, and equity reserves) of MNE's consolidated balance sheet, caused by a change (expected or not expected) in foreign exchange rates. As such, it is not a cash flow change but a result in consolidating into one parent company's financial statement the individual financial statements of related subsidiaries and affiliates.
3. What is risk tolerance? can it be measured?
Risk tolerance is the psychological or philosophical willingness of a firm, or of its managers, to bear risk. As such, it can not be quantified or measured, although observations and comparisons of management decisions over times can provide a rough inkling of such management's risk tolerance.
Variations in risk tolerance reflect the fact that different individuals have different opinions about whether or not a risk is worth bearing, or, conversely, whether or not a risk should be left open ended or hedged.
1. Give a general definition of "foreign exchange exposure" as it relates to the operations of a multinational enterprise.
In its general sense, foreign exposure is the possibilities of either beneficial or harmful effects on companies caused by the change in foreign exchange rates. The effect on the company may be on its cash flows, its profits, or its market value.
2. Explain the differences among the transaction, operation and translating exposure.
Transaction exposure is the potential gain or loss in contracted-for near term cash flows caused by a foreign exchange rate induced change in the value of amounts due to MNE or amount MNE owes to other parties. As such, it is a change in the home currency value of cash flows that are already contracted for.
Operating exposure is the potential for a change in the value of MNE, usually viewed as the present value of all cashinflows, caused by unexpected exchange rate changes. As such, it is a change in expected long-term cash flows; i.e., future cash flow expected in the cause of normal business but not yet contracted for.
Translation exposure is the possibility of change in the entity section(common stock, retained earnings, and equity reserves) of MNE's consolidated balance sheet, caused by a change (expected or not expected) in foreign exchange rates. As such, it is not a cash flow change but a result in consolidating into one parent company's financial statement the individual financial statements of related subsidiaries and affiliates.
3. What is risk tolerance? can it be measured?
Risk tolerance is the psychological or philosophical willingness of a firm, or of its managers, to bear risk. As such, it can not be quantified or measured, although observations and comparisons of management decisions over times can provide a rough inkling of such management's risk tolerance.
Variations in risk tolerance reflect the fact that different individuals have different opinions about whether or not a risk is worth bearing, or, conversely, whether or not a risk should be left open ended or hedged.
In finance, short selling or "shorting" is the practice of selling securities the seller does not then own, in the hope of repurchasing them later at a lower price. This is done in an attempt to profit from an expected decline in price of a security, such as a stock or a bond, in contrast to the ordinary investment practice, where an investor "goes long," purchasing a security in the hope the price will rise.
The term "short selling" or "being short" is often also used as a blanket term for all those strategies which allow an investor to gain from the decline in price of a security. Those strategies include buying options known as puts. A put option consists of the right to sell an asset at a given price; thus the owner of the option benefits when the market price of the asset falls. Similarly, a short position in a futures contract, or to be short a futures contract, means the holder of the position has the obligation to sell the underlying asset at a later date.
The term "short selling" or "being short" is often also used as a blanket term for all those strategies which allow an investor to gain from the decline in price of a security. Those strategies include buying options known as puts. A put option consists of the right to sell an asset at a given price; thus the owner of the option benefits when the market price of the asset falls. Similarly, a short position in a futures contract, or to be short a futures contract, means the holder of the position has the obligation to sell the underlying asset at a later date.
In finance, a long position in a security, such as a stock or a bond, or equivalently to be long in a security, means the holder of the position owns the security and will profit if the price of the security goes up.
Similarly, a long position in a futures contract or similar derivative, means the holder of the position will profit if the price of the underlying security goes up.
Similarly, a long position in a futures contract or similar derivative, means the holder of the position will profit if the price of the underlying security goes up.
Variance = Standard deviation Squared
In finance, standard deviation is a representation of the risk associated with a given security (stocks, bonds, property, etc.), or the risk of a portfolio of securities. Risk is an important factor in determining how to efficiently manage a portfolio of investments because it determines the variation in returns on the asset and/or portfolio and gives investors a mathematical basis for investment decisions. The overall concept of risk is that as it increases, the expected return on the asset will increase as a result of the risk premium earned – in other words, investors should expect a higher return on an investment when said investment carries a higher level of risk.
For example, you have a choice between two stocks: Stock A historically returns 5% with a standard deviation of 10%, while Stock B returns 6% and carries a standard deviation of 20%. On the basis of risk and return, an investor may decide that Stock A is the better choice, because Stock B's additional percentage point of return generated (an additional 20% in dollar terms) is not worth double the degree of risk associated with Stock A. Stock B is likely to fall short of the initial investment more often than Stock A under the same circumstances, and will return only one percentage point more on average. In this example, Stock A has the potential to earn 10% more than the expected return, but is equally likely to earn 10% less than the expected return.
Calculating the average return (or arithmetic mean) of a security over a given number of periods will generate an expected return on the asset. For each period, subtracting the expected return from the actual return results in the variance. Square the variance in each period to find the effect of the result on the overall risk of the asset. The larger the variance in a period, the greater risk the security carries. Taking the average of the squared variances results in the measurement of overall units of risk associated with the asset. Finding the square root of this variance will result in the standard deviation of the investment tool in question. Use this measurement, combined with the average return on the security, as a basis for comparing securities.
From: http://en.wikipedia.org/wiki/Standard_deviation
Topic Related:
Variance
Beta
In finance, standard deviation is a representation of the risk associated with a given security (stocks, bonds, property, etc.), or the risk of a portfolio of securities. Risk is an important factor in determining how to efficiently manage a portfolio of investments because it determines the variation in returns on the asset and/or portfolio and gives investors a mathematical basis for investment decisions. The overall concept of risk is that as it increases, the expected return on the asset will increase as a result of the risk premium earned – in other words, investors should expect a higher return on an investment when said investment carries a higher level of risk.
For example, you have a choice between two stocks: Stock A historically returns 5% with a standard deviation of 10%, while Stock B returns 6% and carries a standard deviation of 20%. On the basis of risk and return, an investor may decide that Stock A is the better choice, because Stock B's additional percentage point of return generated (an additional 20% in dollar terms) is not worth double the degree of risk associated with Stock A. Stock B is likely to fall short of the initial investment more often than Stock A under the same circumstances, and will return only one percentage point more on average. In this example, Stock A has the potential to earn 10% more than the expected return, but is equally likely to earn 10% less than the expected return.
Calculating the average return (or arithmetic mean) of a security over a given number of periods will generate an expected return on the asset. For each period, subtracting the expected return from the actual return results in the variance. Square the variance in each period to find the effect of the result on the overall risk of the asset. The larger the variance in a period, the greater risk the security carries. Taking the average of the squared variances results in the measurement of overall units of risk associated with the asset. Finding the square root of this variance will result in the standard deviation of the investment tool in question. Use this measurement, combined with the average return on the security, as a basis for comparing securities.
From: http://en.wikipedia.org/wiki/Standard_deviation
Topic Related:
Variance
Beta
Variance, Beta and Risk 对我来说，是比较容易混淆的概念，需要熟读的~
In probability theory and statistics, the variance of a random variable, probability distribution, or sample is one measure of statistical dispersion, averaging the squared distance of its possible values from the expected value(mean). Whereas the mean is a way to describe the location of adistribution, the variance is a way to capture its scale or degree ofbeing spread out. The unit of variance is the square of the unit of the original variable. The positive square root of the variance, called the standard deviation, has the same units as the original variable and can be easier to interpret for this reason.The variance of a real-valued random variable is its second central moment, and it also happens to be its second cumulant.Just as some distributions do not have a mean, some do not have avariance as well. The mean exists whenever the variance exists, but notvice versa.
In probability theory and statistics, the variance of a random variable, probability distribution, or sample is one measure of statistical dispersion, averaging the squared distance of its possible values from the expected value(mean). Whereas the mean is a way to describe the location of adistribution, the variance is a way to capture its scale or degree ofbeing spread out. The unit of variance is the square of the unit of the original variable. The positive square root of the variance, called the standard deviation, has the same units as the original variable and can be easier to interpret for this reason.The variance of a real-valued random variable is its second central moment, and it also happens to be its second cumulant.Just as some distributions do not have a mean, some do not have avariance as well. The mean exists whenever the variance exists, but notvice versa.
The hurdle rate is the minimum rate of return that must be met for a company to undertake a particular project. The hurdle rate is usually determined by evaluating existing opportunities in operations expansion, rate of return for investments, and other factors deemed relevant by management. A risk premium can also be attached to the hurdle rate if management feels that specific opportunities inherently contain more risk than others that could be pursued with the same resources. A problem with using a hurdle rate that is too large is that profitable projects will be turned down. As well, a hurdle rate that is too large will bias the firm in favor of short-term projects over long-term projects. Thus, a common method for evaluating a hurdle rate is to apply the discounted cash flow method to the project and then compare that figure against returns that would be available if the same resources were invested in securities.
The hurdle rate is frequently used as synonym of cutoff rate, benchmark and cost of capital.[1]
Reference:
1. ^ Ross, Stephen A., Westerfield, Randolph W., Jaffe, Jeffrey, Corporate Finance, Seventh Edition, McGraw Hill International Edition, 2005, Page 330.
Retrieved from "http://en.wikipedia.org/wiki/Hurdle_rate"
Categories: Corporate finance
The hurdle rate is frequently used as synonym of cutoff rate, benchmark and cost of capital.[1]
Reference:
1. ^ Ross, Stephen A., Westerfield, Randolph W., Jaffe, Jeffrey, Corporate Finance, Seventh Edition, McGraw Hill International Edition, 2005, Page 330.
Retrieved from "http://en.wikipedia.org/wiki/Hurdle_rate"
Categories: Corporate finance
