FINMAR Part2

The three system used for exchanging foreign currencies The Basel Accord, established in _______ by central bank
except governors from ______ major industrialized nations, aimed to

 Currency Futures and Options standardize capital requirements for banks worldwide.
 1988 , 12
Statement 1:Annualized standard deviation is a measure of
volatility. Statement 1:The difference between market return and the risk
Statement 2: The rationale behind comparing the volatility of free rate is the market risk premium.
the stock and sovereign bond markets for a specific country in Statement 2:The third approach assumes that a company's
this method is that they compete with each other for investor exposure to country risk is similar to its exposure to other
funds. market risk.
 Both statements are true  Statement 1 True, Statement 2 False
Agreements where companies lock in future exchange rates It facilitates the free flow of capital throughout Europe and
for currencies they plan to buy or sell. enables banks to offer a wide range of financial services such
 Forward Transactions as lending, leasing, and securities activities across the
European Union
Statement 1: CRP in this case is synonymous with Country  Single European Act
Equity Risk Premium, and the two terms are often used
interchangeably. Statement 1: While most would agree that country risk
Statement 2:Thus, if a country's stock market is significantly premium help by representing that a country, such as
more volatile than the sovereign bond market, its CRP would Myanmar, would present more uncertainty than, say,
be on the lowest side. Germany, some opponents question the utility of CRP.
 Statement 2 True, Statement 1 False Statement 2:Others believe the traditional CAPM can be
broadened into a global model, thus incorporating various
It is a market where foreign exchange transactions occur at the CRPs.
current exchange rate for immediate delivery  Both statements are true
 Spot Market
It serves businesses and governments using U.S. dollars and
Statement 1:The Capital Asset Pricing Model (CAPM) can be other foreign currencies for global transactions.
adjusted to reflect the additional risks of international  Asian Dollar Market
investing.
Statement 2:There are three approaches for incorporating a Statement 1: The country risk premium (CRP) is generally
Country Risk Premium into the CAPM so as to derive an higher for developing markets than for developed nations.
Equity Risk Premium that can be used to assess the risk of Statement 2: Country Risk Premium can have a significant
investing in a company located in a foreign country. impact on valuation and corporate finance calculations
 Both statements are true  Both statements are true
It is a global financial platform where funds move between It facilitates medium-term funding for multinational
savers and borrowers across borders. corporations (MNCs) and domestic firms through loans
 Eurocurrency Market provided by Eurobanks located in foreign markets.
 Eurocredit Market
Statement 1: The third approach considers country risk as a
separate risk factor, multiplying CRP with a variable Statement 1:In determining the CRP, four common approach
(generally denoted by lambda or A). or methodologies were observed.
Statement 2: A final major argument rests on the belief that Statement 2: Equity Risk Method. CRP for a particular
country risk is better reflected in a company's cash flows than country can be estimated by comparing the spread on
the unutilized discount rate. sovereign debt yields between the country and a mature
 Statement 1 True, Statement 2 False market like the U.S.
 Both statements are false
Tools that multinational corporations use to protect themselves
from changing exchange rates. The three features of Eurobond Market except
 Currency Futures and Options  Primary Market
Statement 1: The first approach(total risk premium) assumes Statement 1: In sovereign debt method, CRP is measured on
that every company in the foreign country is equally exposed the basis of the relative volatility of equity market returns
to country risk. between a specific country and a developed nation
Statement 2: Total risk premium approach is commonly used, Statement 2: A fourth method of calculating a CRP number
it makes no distinction between any two companies in the that can be used by equity investors overcomes the drawbacks
foreign country, even if one is a huge export-oriented firm and of the above two approaches,
the other is a small local business in such case  Both statements are false
 Both statements are true

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The three system used for exchanging foreign currencies The Basel Accord, established in _______ by central bank

except governors from ______ major industrialized nations, aimed to

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