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1. What new problems and factors are encountered in international as opposed to domestic financial management?
There are certain new problems and factors encountered in international as opposed to domestic financial management. These are discussed in chapter 22. they are internal control problems, various legal requirements, restrictions rendered by various institutions and problems related to multiple currencies.
2. What does the term arbitrage profits mean?
When the riskless profits are made without investing any funds then it is known as arbitrage profits or when the pricing of certain assets are not done in accordance to an equilibrium relationship, the profit derived is known as arbitrage profit.
According to Keown, Martin, Petty, & Scott, 2005, arbitrage is basically making a riskless profit by selling and buying in more than one market. Covered Interest Arbitrage is the one when there is a difference in the rates of money market and forward market then arbitrage opportunities are present. Arbitrage profits are also received if the relationships between indirect quote and cross quote are not in order. This happens specifically in the spot and forward exchange markets.
3. What can a firm do to reduce exchange risk?
In order to manage and control the foreign exchange risk disclosure a firm require appropriate procedures such as transaction exposure, translation exposure and economic exposure. These are basically the most popular are mostly used procedures or measures of foreign exchange risk. (Keown, Martin, Petty, & Scott, 2005, p. 662).
4. What are the differences between a forward contract, a futures contract, and options?
According to Keown, Martin, Petty, & Scott (2005, p.759) the futures contract is a specialized form of forward contract but it differs from it in regard to an organized exchange, presence of a clearing house, a standardized contract having limited requirements in regard to profits and price changes and a daily resettlement of contracts. A specific commodity or financial claim at a specified price at some future specified time is bought or sold through the future contract. As far as a call option is concerned the call purchaser can make a large amount of money if the prices of the stocks underlying increases. It provides its owner the right to buy certain number of shares of stock at a given price over a given time period.
Keown, A. J., Martin, J. D., Petty, J. W., & Scott, D. F. (2005). Financial Management: Principles and Applications (10th ed.). Upper Saddle River, NJ: Pearson Education, Inc..
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