Students Name: Zhou He
1. In class we discussed why the “Law of One Price” does not work. Name two reasons the law does not work.
Because as following :
1.Goods don’t move without costs from country to country
2.Services are not tradable
3.Still subject to the law of supply and demand
2. Provide definitions for the following:
a. Transaction exposure
Transaction exposure measures changes in the value of outstanding financial obligations incurred to a change in exchange rates but not due to be settled until after the exchange rates change. So it deals with changes in cash flows that results from existing contractual obligations.
b. Translation exposure
Translation exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to "translate" foreign currency financial statements of foreign subsidiaries into a single reporting currency to prepare worldwide consolidated financial statements.
c. Functional currency
It is the currency of the primary economic environment in which the subsidiary operates and in which it generates cash flows. It also the dominant currency used by that foreign subsidiary in its day to day operations.
d. Beta and what it measures.
Beta measures the variability of the rate of return, Formula defines beta as the measure of systematic risk for security. When Beta is less than 1.0, returns are less volatile than the market. Then, Beta will have a calculated value of greater than 1.0 if the rate of return is more volatile than the market rates
e. Incremental cost of capital
The incremental cost of capital refers to the average cost a company incurs to issue one additional unit of debt or equity. The incremental cost of capital varies according to how many more or fewer units of debt or equity a company wishes to issue.
The cost of capital is the weighted average cost of capital formula (WACC), which weights the cost of debt and