Question

Exercise 2: Why should an investor consider the issue of exchange rates when analysing share investments? In your answer explain what impacts a change in exchange rates might have on the performance of a corporation and its share price.

Exercise 3: a) A company makes a $50 000 deposit for six months at 6.40 per cent per annum simple interest. How much interest will the company earn? 2 b) A bank accepts a $15 000 deposit to mature in 135 days, and it pays 5.90 per cent per annum. How much interest will it have to pay? c) A bank accepts a deposit of $105 000 for a term of one year and 97 days, with an interest rate of 6.25 per cent per annum simple interest. Interest is payable six monthly and at the maturity date. How much interest will be paid in total?

Exercise 4: Discuss the nature and purpose of derivative products. In your answer consider the different types of derivative products, the risks managed by these products and the differences between exchange-traded contracts and over-the-counter contracts.

Exercise 5: Define a futures contract. Describe the basic principles behind the use of futures contracts to manage risk exposures.

Answer 1

Exercise 2:

When analyzing share investments, an investor should consider the issue of exchange rates because :

• A company with operations (sales, production etc.) across several countries is exposed to exchange rate risk. The cost of inputs and the sale price are affected by exchange rate movements. These movements could be favorable or unfavorable. Thus, an investor needs to be aware of the impact that exchange rate movements could have on the company's profitability.
• If the company's management of exchange rate risk is good, then it could positively impact the company's profitability and share price. However, if the management of exchange rate risk is not good, then it could negatively impact the company's profitability and share price.
• If the company's shares are listed in a different currency than the investor's home currency, the movement of exchange rates can impact the investor's currency-adjusted returns. If the investor's home currency has depreciated relative to the foreign currency, this could positively impact the investor's net currency-adjusted returns.  If the investor's home currency has appreciated relative to the foreign currency, this could negatively impact the investor's net currency-adjusted returns.