Notes, summaries, assignments, exams, and problems for Economy

Forward Exchange (EUR/SEK):

x = Exchange rate * (1 + SEK interest rate) / (1 + EUR interest rate).

CAP: Establishes an upper limit on interest rates. Floor: Establishes a lower limit on interest rates. EBITDA: Higher than net income. ROE: Return on Equity. For the equity the company provides, it generates an operating income of X annually.

Theoretical Semiannual Euribor:

(1 + First-half rate) * (1 + Second-half rate) = (1 + Annual rate).

Nominal Exchange Rate: (Nominal Exchange Rate * Domestic Price Level) / Foreign Price Level.

Spot Market: Notional amount * (1 / Current exchange rate - 1 / Initial exchange rate). Positive value means that in 9 months the spot market will be more expensive.

FXA (Foreign Exchange Agreement): Notional amount * (1... Continue reading "Understanding Forex, Financial Ratios, and Country Competitiveness" »

Money and Monetary System

• Money: An asset that serves three functions: medium of exchange, store of value, and unit of account.
• Fiat Currency: Money issued by a government with no physical backing (e.g., euro, dollar).
• Fiduciary Currency: Money based on trust, not intrinsic value (e.g., Bitcoin, checks).
• Ledger: An accounting record showing debts and transactions.
• Unit of Account: Allows expressing the price of goods/services (e.g., a coffee costs €2).

Cryptography

• Hash: A mathematical function that converts data into a unique and irreversible digital fingerprint.
• Asymmetric Cryptography: Uses a pair of keys (public and private) to encrypt and decrypt messages.
• Digital Signature: Proves that a message was sent by a specific user and has not been modified.

The Fourteen Points of Woodrow Wilson

• 1. Open diplomacy
• 2. Freedom of the seas
• 3. Removal of economic barriers
• 4. Reduction of armaments
• 5. Adjustment of colonial claims
• 6. Evacuation of Russian territory
• 7. Preservation of Belgian sovereignty
• 8. Restoration of French territory
• 9. Redrawing of Italian frontiers
• 10. Division of Austria-Hungary
• 11. Redrawing of Balkan boundaries
• 12. Limitations on Turkey
• 13. Establishment of an independent Poland
• 14. Creation of an Association of Nations

Importance to Trade

• Fostering global wealth
• Restoring peace in Europe and global balance
• Stimulating international trade

Neoliberalism and Economic Policy

• Privatization generates employment
• Reaction to the economic context of the 1960s and 1970s
• Public spending generates economic

Unit 3: Financial Consolidation Methods

Global Integration (Consolidation)

• Non-current investments: 0
• Share capital and reserves: Parent company only
• Profit/loss: % Parent + (% Subsidiaries × Profit of subsidiaries)
• External shareholder: % Remaining purchase × (Share capital B + Reserves B + Profit/loss B)
• Goodwill: Price paid - (Share capital B × % B)
• Non-controlling interest: % Remaining purchase × (Share capital B + Reserves B + Profit/loss B)
• Non-current assets: Goodwill + PPE (A and B)
• Investment in A: 0 (due to consolidation)

Proportional Integration (Joint Ventures)

• Non-current investments: 0
• PPE, Current Assets, Liabilities, and Profit/loss: Parent + (Subsidiary × % Purchased)
• Share capital and reserves: Parent company only
• Negative differences

What is Prayatna (प्रयत्न)?

In Sanskrit phonetics (as described in texts like Paniniya Shiksha), Prayatna simply means "effort." It is the effort or action made by our speech organs (tongue, lips, vocal cords, etc.) to produce a sound.

Prayatna is divided into two main categories:

1. Ābhyantara Prayatna (आभ्यन्तर प्रयत्न): The Internal Effort
2. Bāhya Prayatna (बाह्य प्रयत्न): The External Effort

1. Ābhyantara Prayatna (Internal Effort)

This is the effort that happens inside the mouth, just before the sound is produced. It describes how the tongue and lips act to shape the sound. According to the Paninian tradition, there are five types of internal effort.

1. Spṛṣṭa (स्पृष्ट)

Competitiveness and Trade

Nominal Exchange Rates

When our currency's value increases, our competitiveness decreases, and importations increase in relative terms.

Price Levels

• Our Country: If prices in our country increase, our exports decrease, and imports increase.
• Foreign Country: If prices in foreign countries increase, our competitiveness increases, benefiting our exports, and our imports decrease.

Foreign Exchange Market

• Price Determination: The exchange rate between countries is established based on supply and demand.
• Hedging: Protection against currency fluctuations, safeguarding investors and businesses from losses due to currency appreciation or depreciation.
• International Finance: Countries can lend and borrow money by converting currencies.

MATLAB is a high-level programming and numerical computing environment developed by MathWorks. It is widely used in engineering and scientific fields for tasks like data analysis, algorithm development, modeling, and simulation. Its core strength lies in its ability to handle matrices and arrays directly, making it well-suited for mathematical computations.

Key Features and Capabilities

• Programming Language: MATLAB incorporates a powerful, matrix-based programming language that allows for concise and efficient expression of mathematical operations.
• Interactive Environment: MATLAB provides an interactive desktop environment for performing calculations, analyzing data, and developing algorithms.

Mathematical Functions

It offers a vast library of built-... Continue reading "MATLAB Programming: Key Features, Uses, and Resources" »

Foreign Exchange Markets and Risk Management

Sectors of the Foreign Exchange Market

• Spot Market
• Forward Market
• Currency (Market)

Determinants of Foreign Exchange Rates

1. Interest Rate Differentials
2. Inflation Rate Differentials
3. Government Policies
4. Market Expectations
5. Investment Opportunities
6. Speculations

Risks Faced by International Companies (Exposure Types)

• Transaction Exposure Risk
• Economic Exposure Risk
• Translation Exposure Risk

Methods of Managing Foreign Exchange Risk

1. Exposure Netting
2. Forward Exchange Contracts
3. Currency Futures and Options
4. Currency Swaps Agreements
5. Foreign Currency Bank Accounts
6. Appropriate Capital Structure

Foreign Exchange Terminology

1. Exchange Rates
2. Spot Rate
3. Forward Rate
4. Direct Quote
5. Indirect Quote
6. Two-Way Quote
7. Bid Rate
8. Offer Rate
9. American Quote
10. European

Credit Risk Ratios and Liquidity Metrics

Short-Term Liquidity — Stock

• Current Ratio = Current Assets / Current Liabilities (>1 is better)
• Quick Ratio = (Cash + Short-Term Investments + Receivables) / Current Liabilities
• Cash Ratio = (Cash + Short-Term Investments) / Current Liabilities

Short-Term Liquidity — Flow

• Cash Flow Ratio = Cash Flow from Operations / Current Liabilities
• Defensive Interval = (Cash + Short-Term Investments + Receivables) / Capital Expenditures × 365
• Cash Flow to Capital Expenditures = Unlevered Cash Flow from Operations / Capital Expenditures

Long-Term Solvency — Stock

• Debt to Assets = Total Debt / Total Assets
• Debt to Equity = Total Debt / Total Equity
• Long-Term Debt Ratio = Long-Term Debt / (Long-Term Debt + Equity)

Long-

Equity and Financial Concepts

Free Cash Flow (FCF)

FCF_t = EBIT + DEP - CAPEX - ΔWC - TAX

ΔWC = Δreceivables + Δinventories - Δpayables + Δother items

TAX = (EBIT-Y_t)*T = EBIT*T - Y_tT

FCFE = FCF_t - Y_t - PRINC_t

FCF_t^u = FCF_t - Y_tT

Y = k_dD₀ (interest paid is cost of debt*value of debt)

Standard WACC

k_s=(1-L)k_e + Lk_d(1-T) | Use Standard WACC with FCF_u | ITS is not included in both FCF_u & k_s | Need Constant Target Leverage Ratio (L)

k_e = reflects operating and financial risk faced by investors | k_u = unlevered cost of equity (if firm had no debt), reflects operating risk

V₀ = U₀ + I₀ (Enterprise Value = value of operations + value of ITS) | Leave space for Standard WACC equation if k_its = k_d OR k_its = k_u

Standard WACC model implicitly assumes k_its... Continue reading "Understanding Equity, WACC, and Discount Rates in Finance" »