1. What new problems and factors are encountered in international as opposed to domestic

    financial management?

            The problems unique to the international market are political risk and Exchange rate risk. A             company must take into account the political ways of the country in which they are doing             business, and you have to take into account currency exchange.

2. What does the term “arbitrage profits” mean?

            Arbitrage profits are no-risk profits. When an arbitrageur buys a currency in one market,             and then sells that same currency in another market for a higher price, he receives a profit      with no risk.

3. What can a firm do to reduce exchange risk?

            A firm can use Money-Market Hedge, Forward Market Hedge, Leading, and Lagging to           reduce exchange risk.

4. What are the differences between a forward contract, a futures contract, and options?

            A forward contract requires delivery, at a specified future date, of one currency for another             specified amount of another currency. The forward contract exchange rate is agreed upon          the date of the contract, deciding what the actual monetary payment will be on the delivery            date. Futures contracts and options are traded in standard amounts with standard maturity       dates.  Also, futures and options permit fixed price foreign currency transactions anytime    before maturity, where forward contracts do not. Forward contracts are written by banks,           where futures and options are traded on organized exchanges. Forward contracts require           only good credit with the bank, where futures requires the fulfillment of margin requirements. A purchase of options requires an immediate outlay that reflects the premium          above the strike price and an outlay equal to the strike price when and if the options are             executed.