1.

The net operating cycle equals 10 (minus 10). Which if the following responses are the correct one

(2 Points)

It is a result of a situation in which number of days in inventory equals to 30 days and number of days in receivables equals 15 days and the number of days in payables equals 55 days. Additionally we can also declare that the company is being financed by its suppliers meaning that working capital is rather positive one but on the other hand this helps the company to be financed by low-priced capital which at the end is a convenient situation.

It is a result of a situation in which number of days in inventory equals to 15 days and number of days in receivables equals 10 days and the number of days in payables equals 35 days. Additionally we can also declare that the company is being financed by its suppliers meaning that working capital is rather negative one but on the other hand this helps the company to be financed by low-priced capital which at the end is a convenient situation.

It is a result of a situation in which number of days in inventory equals to 15 days and number of days in receivables equals 10 days and the number of days in payables equals 10 days. Additionally we can also declare that the company is being financed by its owners meaning that working capital is rather negative one which means that the company is being financed by high priced capital which it is not a convenient situation.

It is a result of a situation in which number of days in inventory equals to 20 days and number of days in receivables equals 10 days and the number of days in payables equals 20 days. Additionally we can also declare that the company is being financed by its suppliers meaning that working capital is rather positive one but on the other hand this helps the company to be financed by low-priced capital which at the end is a convenient situation.

2.

Traditional Interest rate swaps

(2 Points)

Interest rate swaps involve the exchange of a floating interest rate for another floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap.

Interest rate swaps involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap.

Interest rate swaps involve the exchange of a fixed interest rate in one currency for a floating rate in another currency, or vice versa, to reduce or increase exposure to fluctuations in interest rates and exchange rate or to obtain a marginally lower interest rate than would have been possible without the swap.

3.

The foreign exchange rate of EUR/PLN is now 4,40. After a while, it was changed to 4,35 by the market forces. We can state:

(2 Points)

The Polish currency has been revaluated to the Euro currency which is making the Polish exporters to contribute from this situation as their products or services being provided on the foreign markets will benefit them in higher value amount in local currency.

The Polish currency has been appreciated to the Euro currency which is making the Polish importers to contribute from this situation as the products or services they are selling abroad will be more expensive for them while the exporters will be dissatisfied with this change.

The Polish currency has been appreciated to the Euro currency which is making the Polish importers to contribute from this situation as the products or services they are purchasing abroad will be cheaper for them while the exporters will be dissatisfied with this change.

The Polish currency has been depreciated to the Euro currency which is making the Polish exporters to contribute from this situation as their products or services being provided on the foreign markets will benefit them in larger value amount in foreign currency.

4.

Arbitrage in market will be profitable if:

(2 Points)

The investor will open a short position in index futures contracts for S&P 500 and simultaneously it will make a short selling of shares included in the stock index Nikkei 225 if the theoretical index futures contract is being valued with higher price than its current market value. The investor will open a short position in index futures contracts for Nikkei 225 and simultaneously will make short selling of shares included in the stock index S&P 500 if the theoretical index futures contract is being valued with lower price than its current market value.

The investor will open a long position in index futures contracts for S&P 500 and simultaneously it will make a short selling of shares included in the stock index S&P 500 if the theoretical index futures contract is being valued with higher price than its current market value. The investor will open a short position in index futures contracts for S&P 500 and simultaneously will purchase shares included in the stock index S&P 500 if the theoretical index futures contract is being valued with lower price than its current market value.

The investor will open a long position in index futures contracts for S&P 500 and simultaneously it will make a short selling of shares included in the stock index S&P 500 if the theoretical index futures contract is being valued with lower price than its current market value. The investor will open a short position in index futures contracts for S&P 500 and simultaneously will purchase shares included in the stock index S&P 500 if the theoretical index futures contract is being valued with higher price than its current market value.

The investor will open a short position in index futures contracts for S&P 500 and simultaneously it will make a short selling of shares included in the stock index S&P 500 if the theoretical index futures contract is being valued with higher price than its current market value. The investor will open a long position in index futures contracts for S&P 500 and simultaneously will purchase shares included in the stock index S&P 500 if the theoretical index futures contract is being valued with lower price than its current market value.

5.

Payment in advance vs Open Account

(2 Points)

Payments in advance is not useful for exporter as it assumes all risks and there is no advantages to him. While the importer could secure high cost however Importer assumes no risks and opportunity cost of using companys cash resources until goods are received. Open account does provide advantage to exporter (by clinching the sales) as he assumes no risks. On the other hand open account assumes full risks for importer and it delays use of companys cash resources thus is not attractive to importer.

Payments in advance is useful for importer as it assumes no risks and there is no disadvantages to him. While the exporter could secure low cost however exporter assumes all risks and opportunity cost of using companys cash resources until goods are received. Open account does not provide any advantage to importer (besides clinching the sales) as he assumes all risks. On the other hand open account assumes no risks for exporter and helps delays use of companys cash resources thus is very attractive to exporter.

Payments in advance is useful for exporter as it assumes no risks and there is no disadvantages to him. While the importer could secure low cost however Importer assumes all risks and opportunity cost of using companys cash resources until goods are received. Open account does not provide any advantage to exporter (besides clinching the sales) as he assumes all risks. On the other hand open account assumes no risks for importer and helps delays use of companys cash resources thus is very attractive to importer.

6.

Documents Against Acceptance (D/A)

(2 Points)

This is type of transaction that for the importer is more costly than a Letter of Credit and may provide formal/legal means to collect unpaid obligation however the importer takes on the risk of non-acceptance of documents and also commercial and country risks are not hedged. Although if bill of exchange/draft is accepted by the exporter, there is no guarantee of payment by the banks involved. Legal enforcement of unpaid obligation are costly and time-consuming. On the other hand the exporter will receive goods before having to make payment but dishonouring an accepted draft is a legal liability and may ruin business reputation.

This is type of transaction that for the exporter is less costly than a Letter of Credit and may provide formal/legal means to collect unpaid obligation however the exporter takes on the risk of non-acceptance of documents and also commercial and country risks are not hedged. Although if bill of exchange/draft is accepted by the Importer, there is no guarantee of payment by the banks involved. Legal enforcement of unpaid obligation are costly and time-consuming. On the other hand the importer will receive goods before having to make payment but dishonouring an accepted draft is a legal liability and may ruin business reputation.

This is type of transaction that for the exporter is less costly than a Clean Payment and may provide formal/legal means to collect unpaid obligation however the exporter takes on the risk of non-acceptance of documents and also commercial and country risks are not hedged. Although if bill of exchange/draft is accepted by the Importer, there is guarantee of payment by the banks involved. Legal enforcement of unpaid obligation are not costly and time-consuming. On the other hand the importer will receive goods after having to make payment but dishonouring an accepted draft is not a legal liability and does not injure business reputation.

7.

Letter of credits

(2 Points)

For exporter an undertaking from the Issuing Bank that he will receive payment under the Letter of Credit provided that you meet all terms and conditions of the Letter of Credit. Thus it shifts credit risk from the Importer to the Issuing bank and it is obligated to ship against a Letter of Credit even if it is not issued as agreed. Exporter must bear in mind that the documents must be prepared in strict compliance with the requirements stipulated in the Letter of Credit. Non-compliance leaves Exporter exposed to risk of non-payment. Importer is not assured that, for the Exporter to be paid, all terms and conditions of the Letter of Credit must be met. Importer is able to negotiate more favourable trade terms with the Exporter when payment by Letter of Credit is offered. A Letter of Credit assures correct documents and correct goods for importer and ties up line of credit.

For exporter an undertaking from the Issuing Bank that he will receive payment under the Letter of Credit provided that you meet all terms and conditions of the Letter of Credit. Thus it shifts credit risk from the exporter to the importer and it is obligated to ship against a Letter of Credit that is issued as agreed. Exporter must bear in mind that the documents must be prepared in strict compliance with the requirements stipulated in the Letter of Credit. Non-compliance leaves Exporter exposed to risk of non-payment. Importer is assured that, for the Exporter to be paid, all terms and conditions of the Letter of Credit must be met. Importer is able to negotiate more favourable trade terms with the Exporter when payment by Letter of Credit is offered. A Letter of Credit assures correct delivery of goods for importer and does not tie up line of credit.

For exporter an undertaking from the Issuing Bank that he will receive payment under the Letter of Credit provided that you meet all terms and conditions of the Letter of Credit. Thus it shifts credit risk from the Importer to the Issuing bank and it is not obligated to ship against a Letter of Credit that is not issued as agreed. Exporter must bear in mind that the documents must be prepared in strict compliance with the requirements stipulated in the Letter of Credit. Non-compliance leaves Exporter exposed to risk of non-payment. Importer is assured that, for the Exporter to be paid, all terms and conditions of the Letter of Credit must be met. Importer is able to negotiate more favourable trade terms with the Exporter when payment by Letter of Credit is offered. A Letter of Credit assures correct documents but not necessarily correct goods for importer and ties up line of credit.

For importer an undertaking from the Issuing Bank that he will receive payment under the Letter of Credit provided that you meet all terms and conditions of the Letter of Credit. Thus it shifts credit risk from the exporter to the Issuing bank and it is not obligated to ship against a Letter of Credit that is not issued as agreed. Importer must bear in mind that the documents must be prepared in strict compliance with the requirements stipulated in the Letter of Credit. Non-compliance leaves Importer exposed to risk of non-payment. Exporter is assured that, for the Importer to be paid, all terms and conditions of the Letter of Credit must be met. Exporter is able to negotiate more favourable trade terms with the Importer when payment by Letter of Credit is offered. A Letter of Credit assures correct documents but not necessarily correct goods for exporter and ties up line of credit.

8.

There are three types of foreign exchange risk:

(2 Points)

Transaction risk is the risk that a company faces when it's selling a product from a company located in another country. The price of the product will be denominated in the selling company's currency. If the selling company's currency were to depreciated versus the selling company's currency then the company doing the selling will have to make a larger payment in its base currency to meet the contracted price. Translation risk happens when a parent company owning a subsidiary in another country could face losses when the subsidiary's financial statements, which will be denominated in that country's currency, have to be translated back to the subsidiary's currency. Economic risk refers to when a companys book value is continuously impacted by an unavoidable exposure to currency fluctuations.

Transaction risk is the risk that a company faces when it's buying a product from a company located in the same country. The price of the product will be denominated in the buying company's currency. If the selling company's currency were to appreciate versus the buying company's currency then the company doing the buying will have to make a lower payment in its base currency to meet the contracted price. Translation risk happens when a parent company owning a subsidiary in another country could generate profits when the subsidiary's financial statements, which will be denominated in that country's currency, have to be translated back to the parent company's currency. Economic risk refers to when a companys market value is continuously impacted by an unavoidable exposure to interest rate fluctuations.

Transaction risk is the risk that a company faces when it's buying a product from a company located in another country. The price of the product will be denominated in the selling company's currency. If the selling company's currency were to appreciate versus the buying company's currency then the company doing the buying will have to make a larger payment in its base currency to meet the contracted price. Translation risk happens when a parent company owning a subsidiary in another country could face losses when the subsidiary's financial statements, which will be denominated in that country's currency, have to be translated back to the parent company's currency. Economic risk refers to when a companys market value is continuously impacted by an unavoidable exposure to currency fluctuations.

9.

Some securities provide inflationary risk protection without attempting to do so. Examples of them include:

(2 Points)

Convertible bonds as they are traded like bonds and sometimes like stocks and variable-rate securities because their cash flows to the holder (interest payments, dividends, etc.) are based on indices such as the prime rate that are directly or indirectly affected by inflation rates.

Variable-rate securities because their cash flows to the holder (interest payments, dividends, etc.) are based on foreign exchange rate such as the prime rate that are directly or indirectly affected by inflation rates or putable bonds as they are traded like bonds and sometimes like stocks.

Callable bonds as they are traded like bonds and sometimes like stocks and fixed-rate securities because their cash flows to the holder (interest payments, dividends, etc.) are based on indices such as the prime rate that are directly or indirectly affected by inflation rates.

10.

Hedging payables and receivables

(2 Points)

Typical methods for hedging the payables includes money market hedge which is based on the process of borrowing foreign currency to be received and then converting it to domestic currency and then investing for future use. The further method may include the use of derivatives (short position in FX forward or placing short position in Put Option). Typical methods for hedging the receivables includes money market hedge which is based on the process of borrowing home currency and then converting it to foreign currency and then investing for future use. The further method may include the use of derivatives (long position in FX forward or placing short position in call Option).

Typical methods for hedging the receivables includes money market hedge which is based on the process of borrowing foreign currency to be received and then converting it to domestic currency and then investing for future use. The further method may include the use of derivatives (long position in Call Option or placing short position in Put Option). Typical methods for hedging the payables includes money market hedge which is based on the process of borrowing home currency and then converting it to foreign currency and then investing for future use. The further method may include the use of derivatives (long position in Put Option or placing short position in call Option).

Typical methods for hedging the receivables includes money market hedge which is based on the process of borrowing foreign currency to be received and then converting it to domestic currency and then investing for future use. The further method may include the use of derivatives (short position in FX forward or placing long position in Put Option). Typical methods for hedging the payables includes money market hedge which is based on the process of borrowing home currency and then converting it to foreign currency and then investing for future use. The further method may include the use of derivatives (long position in FX forward or placing long position in call Option).

Typical methods for hedging the receivables includes money market hedge which is based on the process of borrowing foreign currency to be received and then converting it to domestic currency and then investing for future use. The further method may include the use of derivatives (long position in FX forward or placing short position in Put Option). Typical methods for hedging the payables includes money market hedge which is based on the process of borrowing home currency and then converting it to foreign currency and then investing for future use. The further method may include the use of derivatives (short position in FX forward or placing short position in call Option).

11.

If the current ratio equals 2 and the quick ratio equals 1,95 it means that

(2 Points)

You need to sell 50% of the fixed assets to satisfy the long-term liabilities immediately and it means that the company does have very extensive (large) percentage share of inventories within the structure of fixed assets in the balance sheet.

You need to sell 50% of the current assets to satisfy the current liabilities immediately and it means that the company does have very low percentage share of inventories within the structure of current assets in the balance sheet.

You need to sell 25% of the current assets to satisfy the long-term liabilities immediately and it means that the company does have very low percentage share of inventories within the structure of current assets in the balance sheet.

You need to sell 25% of the fixed assets to satisfy the current liabilities immediately and it means that the company does have low percentage share of inventories within the structure of current assets in the balance sheet.

12.

Bonds

(2 Points)

Convertible bonds do not pay coupon payments and instead are issued at a discount to their par value that will generate a return once the bondholder is paid the full face value when the bond matures. Zero-coupon bonds are debt instruments with an embedded option that allows bondholders to convert their debt into stock (equity) at some point, depending on certain conditions like the share price. A puttable bond is one that can be called back by the company before it matures. A callable bond is riskier for the bond buyer because the bond is more likely to be called when it is rising in value. Callable bond allows the bondholders to put or sell the bond back to the company before it has matured. This is valuable for investors who are worried that a bond may fall in value, or if they think interest rates will rise and they want to get their principal back before the bond falls in value.

Zero-coupon bonds do not pay coupon payments and instead are issued at a discount to their par value that will generate a return once the bondholder is paid the full face value when the bond matures. Convertible bonds are debt instruments with an embedded option that allows bondholders to convert their debt into stock (equity) at some point, depending on certain conditions like the share price. A callable bond is one that can be called back by the company before it matures. A callable bond is riskier for the bond buyer because the bond is more likely to be called when it is rising in value. Puttable bond allows the bondholders to put or sell the bond back to the company before it has matured. This is valuable for investors who are worried that a bond may fall in value, or if they think interest rates will rise and they want to get their principal back before the bond falls in value.

Zero-coupon bonds do not pay coupon payments and instead are issued at a discount to their par value that will generate a return once the bondholder is paid the full face value when the bond matures. Convertible bonds are debt instruments with an embedded option that allows bondholders to convert their debt into stock (equity) at some point, depending on certain conditions like the share price. A puttable bond is one that can be called back by the company before it matures. A putable bond is riskier for the bond buyer because the bond is more likely to be called when it is rising in value. Callable bond allows the bondholders to put or sell the bond back to the company before it has matured. This is valuable for investors who are worried that a bond may fall in value, or if they think interest rates will rise and they want to get their principal back before the bond falls in value.

13.

The investor is the owner of the following assets: shares of insurance company and owner of the construction company and also the owner of shares of airline company and shares of petroleum producer. We can state that:

(2 Points)

The investor has mitigated specific risk and additionally his investments are among other being positively correlated between each other making the investment hedged against such situations like earthquake or changes in oil prices on the market.

The investor has mitigated his market risk and additionally his investments are among other being negatively correlated between each other making the investment hedged against such situations like earthquake or changes in oil prices on the market.

The investor has mitigated his market risk and additionally his investments are among other being positively correlated between each other making the investment hedged against such situations like earthquake or changes in oil prices on the market.

The investor has mitigated his market risk and additionally his investments are among other being negatively correlated between each other making the investment hedged against such situations like earthquake or changes in oil prices on the market.

14.

Interest rate risk

(2 Points)

For fixed-income securities, as interest rates rise security prices fall (and vice versa). This is because when interest rates increase, the opportunity cost of holding those bonds increases that is, the cost of missing out on an even better investment is greater. The rates earned on bonds therefore have less appeal as rates rise.

For variable-income securities, as interest rates fall security prices rise (and vice versa). This is because when interest rates decrease, the opportunity cost of holding those bonds decreases that is, the cost of missing out on an even better investment is greater. The rates earned on bonds therefore have higher appeal as rates rise

For fixed-income securities, as interest rates rise security prices rise. This is because when interest rates increase, the opportunity cost of holding those bonds increases that is, the cost of missing out on an even better investment is lower. The rates earned on bonds therefore have less appeal as rates rise

For variable-income securities, as interest rates fall security prices rise (and vice versa). This is because when interest rates increase, the opportunity cost of holding those bonds increases that is, the cost of missing out on an even better investment is greater. The rates earned on bonds therefore have less appeal as rates rise

15.

Working capital is the primary responsibility of the Treasurer

(2 Points)

Every business needs cash for their operating, financing, investing and other functions. And it is one of the most basic roles for a Treasurer to be able to deploy efficient cash management setups, know and measure the current and future cash balances, ensure liquidity for daily operations, accurately forecast the future sales revenues, enhance money market yields on current cash balances.

Every business needs cash for their operating, financing, investing and other functions. And it is one of the most basic roles for a Treasurer to be able to deploy efficient cash management setups, know and measure the current cash balances, ensure solvency for daily operations, accurately forecast the current cash flows, enhance yields on debit cash balances.

Every business needs cash for their operating, financing, investing and other functions. And it is one of the most basic roles for a Treasurer to be able to deploy efficient cash management setups, know and measure the current cash balances, ensure liquidity for daily operations, accurately forecast the future cash flows, enhance yields on excess cash balances.