Ex. 16. Find a table of foreign exchange rates in a daily paper. Which currencies have a higher value relative to the Rouble? How does it affect the situation?

READING PRACTICE

Ex. 17. Read the text quickly to find the types of most widely used swaps:

Foreign Exchange Swaps

 

Swaps are transactions in which two parties swap financial assets by linking a foreign exchange transaction in cash to an opposite futures business in the same currency.

Foreign Exchange Swap Markets have developed since the early 1980s. The oldest type of swap is the conventional foreign exchange deal whereby one currency is simultaneously bought spot and sold forward against another – meaning an immediate exchange of cash followed by a further reverse exchange at a specified date in the future.

The idea of swapping has now spread further. By far the largest business volume amongst swaps occurs in the so-called "vanilla interest rate swap". A "plain vanilla", or fixed-to-fixed foreign exchange, or currency swap is an exchange of the principal and interest payments associated with a fixed-rate loan in one currency for the principal and interest payments on a similar loan in a second currency. The first such swap between IBM and the World Bank was done in 1981. Since then the swap market has grown to over $ 1 billion and, in the process, has evolved several additional types of currency swaps.

Words you may need:

 

Foreign Exchange Swap валютный «своп»

to buy spot купить на условиях «спот»

followed by за которым следует...

vanilla interest rate swap «своп» процентный

plain vanilla простой процентный «своп»

evolve v развиваться, эволюционировать

Ex. 18. a) Read the text quickly to find answers to the following questions:

What does the price of a foreign exchange option depend on?

What are the prospects for the option markets?

Foreign Exchange Options

 

Options as a financial instrument have a reasonably short history in financial markets, with the first option contracts being traded in Chicago in 1973. In foreign exchange, a call option on the US dollar is the right to buy the US dollar, and a put option is the right to sell the US dollar. To purchase an option, the buyer has to pay a premium. To write an option, the seller receives a premium.

There are three different types of users of foreign exchange options: the corporate treasury, the fund manager, and the commercial bank trading room. For example, in the currency option markets, the corporate treasury can buy the right, but not the obligation, to sell or buy currency forward, if required. This option, to decide whether to buy or sell currency, is particularly important when the firm is unsure about the timing or size of foreign currency receipts or payment.

International banks, hi their turn, use currency options for their customers and for their own trading. In the past few years, nearly all dealing rooms have seen a large growth in the use of currency options and banks have started employing traders purely to trade currency options for the bank's own account.

Options are also sold "over the counter" (OTC) in a manner similar to currency forward contracts. OTC contracts have very flexible terms arranged by negotiation between the (normal bank) supplier and corporate buyer. Thus the currencies to be bought and sold can vary according to the corporate customer's needs and do not have to correspond to exchange market conventions. Amounts, duration of the option, and price can all be negotiated and matched to the corporate customers' exposure.

The volume of trading on the OTC market between banks is even higher than on the listed options market. There is no public secondary market in OTC currency options but trading is conducted by telephone using prices available on screen systems provided by large international (commercial and investment) banks. MNCs are major users of OTC options and are key participants in the screen markets. These OTC markets are closely linked to spot and forward markets in currency in which the banks and MNCs also play central roles.

The organised currency option exchanges provide an important public pricing mechanism for the MNC treasurer and may also provide a suitable currency option contract for foreign cash flows of known size but uncertain likelihood of occurrence.

The price of a foreign exchange option depends on: the length of a period desired to be covered by the option; the underlying volatility of the foreign exchange market; the relationship between the spot exchange rate and the desired price or the desired strike price; option premium; foreign interest rate.

Moreover, the type of currency option that financial institutions, corporations and the like can trade in vary from the extremely simple to the very sophisticated. It is possible to design tailor-made foreign exchange options to suit requirements, as essentially a foreign exchange option is akin to an insurance premium on the foreign exchange market. All this makes this instrument very attractive.

Within the past fifteen years the use of options has grown in all financial markets. It seems quite likely that foreign exchange options will grow further in coming years.

Words you may need:

call option опцион «колл»

put option опцион «пут»

to write an option исполнить опцион

corporate treasury подразделение в корпорации, занимающееся управлением ее свободными средствами

to sell (buy) forward продать (купить) на срок

convention и конвенция, соглашение

strike price цена исполнения

and the like и тому подобное

tailor-made adj с учетом потребностей заказчика

to be akin (to) быть сродни, быть близким (чему-л.)

UNIT 12.FINANCIAL MANAGEMENT

A. TEXT

 

FINANCE FUNCTION

 

Any business – whether large or small, profit-seeking or not-for-profit – has important financial concerns:

How to get the funds needed to run the business on favourable terms and how to make sure that the funds are used effectively?

In this connection modern businesses have financial managers to look after these problems, whose major objective is to maximize the value of the firm for its owners, i.e. to maximize the shareholders' wealth, which is represented by the market price of a firm's common stock.

Managers daily face questions like the following:

• What assets to acquire?

• Will a particular investment be profitable?

• Where will the funds come from to finance the investment?

• How much to maintain as equity capital?

• Does the firm have adequate cash or access to cash – through bank borrowing agreements, for example, to meet its daily operating needs?

• Which customers should be offered credit and how much should they be offered?

• How much inventory should be held?

• Is the merger or acquisition advisable?

• How should profits be used or distributed? What is the optimal dividend policy?

• How should the firm behave in the situation of exchange rate variations and interest rate changes?

• How should risk to which the firm is exposed and return be balanced?

Financial managers are primarily concerned with the management of fixed assets, working capital management, including management of current assets and current liabilities, cash management, receivables management and inventory management; they are responsible for designing capital structure, choosing long- and short-term financing techniques.

The financial manager has to take these decisions with reference to the objectives of the firm.

To have a better understanding of how managers go about all these concerns one should know what resources managers typically have at their disposal. The position of an enterprise, its assets and capital are best illustrated by its financial statements – the balance sheet and the income statement.

The first major component of the balance sheet of an enterprise is its assets, which are the resources owned by the enterprise. The standard classification of assets divides them into: 1) fixed assets, 2) current assets, 3) investments and 4) other assets.

Fixed assets are assets purchased for use in the business on a permanent basis, e.g. land and buildings, plant and machinery, furniture, motor vehicles, etc.

Current assets are short-term in nature. They are also known as liquid assets and include cash, marketable securities, accounts receivable (debtors), notes/bills receivable and inventory, including finished goods or work in process.

Investments represent investment of funds in the securities of another company, the purpose of which is either to earn a return or/and to control another company.

The second major component of the balance sheet is liabilities of the enterprise, which represent the amount that the enterprise owes to other enterprises, or the outside sources which the enterprise uses to finance its assets. They are: long-term liabilities (obligations payable after the accounting period) – debentures, bonds, mortgages, secured loans – and current liabilities (obligations usually repayable within the accounting period) – accounts payable, bills/notes payable, accrued expenses, deferred income and short-term bank credit.

The third major component of a balance sheet is the owners' equity-part of the resources of a firm which are supplied by its owners – shareholders. The owners' equity may consist of two elements: paid-up capital (the initial amount of funds contributed by the shareholders) and retained earnings (part of the profits of the shareholders which is not paid out to them as dividends but ploughed back in the business).

Capital is the store of accumulated wealth contributed to the firm by its proprietors – it is the net worth of the business to the owners. Fixed capital is capital tied up in fixed assets. Working capital is the capital available for working the business. When an enterprise has bought fixed assets it still needs further capital to buy raw materials, etc., or money to pay wages.

The finance function in a firm is usually headed by a chief financial officer (CFO), who reports to the firm's president.

The chief financial officer distributes the financial management responsibilities between the controller and the treasurer.

B. TEXT

FINANCIAL RATIOS

 

A financial ratio is a relationship between particular groups of assets or liabilities of an enterprise and corresponding totals of assets or liabilities, or between assets or liabilities and flows like turnover or revenue.

A leading example is the price/earnings ratio which is the ratio of the current quoted stock exchange price of an equity to the most recent declared dividend per share.

Another is the ratio of equity to debt finance (gearing ratio) within a company's overall capital structure.

Financial ratios are used to give summary indications of the financial performance, prospects or strength of a company which help financial managers to make a comparison of a firm's financial condition over time or in relation to other firms.

No single financial ratio can answer all questions analysts may have.

In fact, five different groups of ratios have been developed:

a) liquidity ratios indicating a firm's ability to meet short-term financial obligations;

b) activity ratios indicating how efficiently a firm is using its assets to generate sales;

e) financial leverage ratios indicating a firm's capacity to meet short- and long-term debt obligations;

d) profitability ratios measuring how effectively a firm's management generates profits on sales, assets, and stockholders' investments;

e) market-based ratios measuring the financial market's evaluation of a company's stock.

C. DIALOGUE

RATIO ANALYSIS

Russian: Are there any guidelines which enable the businessman to conduct his affairs efficiently and profitably and to compare his company's performance with those of other companies?

American: Yes, there are. One of the major tools is ratio analysis. Ratios make it easy to see trends, risks and to assess the results. All most important decisions are based on ratios.

R.: What are the most commonly used ratios?

Am.: We in the US operate with three main categories of ratios. We use ratios measuring solvency, efficiency, and profitability.

R.: Could you give some examples of each?

Am.: Yes, sure. Let's begin with measuring solvency.

R.: Solvency is the ability of a firm to meet its short-term liabilities as they come due, isn't it?

Am.: Yes, you are absolutely right. And one of the most commonly used measures of solvency is the current ratio.

R.: How is it found?

Am.: This is the ratio of all current assets, liquid assets, accounts receivable and inventories to current liabilities.

R.: When is a firm considered solvent on this measure?

Am.: If its current ratio is 2 to 1 or above. There is another ratio related to this one. It's the-debt-to-equity ratio. It is found by dividing total debt by the equity.

R.: I see. It's the indebtedness of a firm compared to its equity capital. But it's really more a measure of leverage than a measure of solvency.

Am.: Yes, you are right in a way. A highly leveraged company is one with a high proportion of bank loans to equity. But the ratio has some bearing on solvency, too. A low debt-to-equity ratio makes it easier for a firm to borrow to meet its short-term cash needs.

R.: That's clear. A ratio higher than 1 to 1 would make a firm a risky borrower. And what ratios help to measure a firm's efficiency?

Am.: One such ratio is that of sales to inventory, called the inventory turnover ratio.

R.: We say that stock or inventory has "turned over" when it has been sold and replaced with new stock. If we want to double our profit one way is to double the rate of stock turnover.

Am.: Yes, and this ratio varies widely from one industry to another. We can't say whether the ratio is good or poor until we know the product we are discussing. And now let's turn to measuring profitability.

R.: It's the figure that really matters in the end to any businessman, isn't it?

Am.: Yes, practically there are two measures that compare profit to the capital invested in a firm. One such measure is return on equity and the other is return on assets. Both are very important for investors.

R.: No doubt. Knowing the payback of an investment is important because the earlier the payback, the quicker the money can be reinvested, and also the less the risk investors are exposed to.

Am.: You are right, the ratios show how the capital "works". Investors' decisions totally depend on the ratios.

VOCABULARY LIST

A. financial management управление финансовой деятельностью, финансовый менеджмент

Finance function организация финансовой деятельности

concern n (зд.) интерес, озабоченность

maximize v довести до максимума

common stocks обычные акции

acquisition n поглощение (компании)

to be exposed to risks быть подверженным риску

management of fixed assets управление основными средствами

working capital management управление текущими активами

management of current assets управление оборотными средствами

management of current liabilities управление краткосрочными обязательствами

cash management управление денежными операциями

receivables management управление дебиторской задолженностью

inventory management управление запасами, материально-техническим снабжением

capital structure структура капитала

long-term/short-term financing долгосрочное/краткосрочное финансирование

assets n pl активы

financial statements финансовая отчетность

balance sheet балансовый отчет

income statement отчет о прибылях и убытках

liquid assets ликвидные средства

accounts receivable счета дебиторов

notes/bills receivable векселя к получению

work in process незавершенное производство

liabilities n обязательства

accounting period отчетный период

mortgage n закладная

accounts payable кредиторская задолженность

bills/notes payable векселя к оплате

accrued expenses начисленные издержки

deferred income доходы будущих лет

equity (зд.) акционерный капитал

paid-up capital оплаченная часть акционерного капитала

retained earnings нераспределенная прибыль

dividends n дивиденды

to plough back превращать в капитал

net worth of the business собственный капитал фирмы

fixed capital основные средства (фонды)

working capital оборотный капитал (средства, фонды)

chief financial officer вице-президент корпорации по финансам

controller n финансист-контролер, ведущий анализ хозяйственной и учетно-финансовой деятельности

treasurer n казначей компании

B. financial ratios финансовые коэффициенты/показатели

price/earnings ratio отношение рыночной цены (акции) к чистой прибыли компании (в расчете на одну акцию)

gearing ratio (debt-to-equity ratio) отношение задолженности к собственному капиталу

indication n показатель

analyst n экономист-аналитик

liquidity ratio коэффициент ликвидности

financial leverage ratios доля заемных средств в совокупном капитале

C. ratio analysis кредитный и инвестиционный анализ

solvency n платежеспособность

efficiency n эффективность

profitability n доходность, рентабельность

current ratio отношение оборотного капитала к краткосрочным обязательствам

debt-to-equity ratio соотношение собственных и заемных средств

indebtedness n задолженность

inventory turnover ratio оборачиваемость товарных запасов

to turn over оборачиваться

return on equity доход от акций, доход на собственный (акционерный) капитал

return on assets доход от имущества

payback of an investment окупаемость инвестиций

EXERCISES

Ex. 1. Answer these questions:

 

A. 1. What financial concerns face every enterprise?

2. What problems do finance managers face daily?

3. What does financial management involve?

4. What are financial managers concerned with?

5. What are the major components of a balance sheet?

6. How is the finance function most commonly organized?

B. 1. What is a financial ratio?

2. What do financial ratios help to measure?

3. What groups of ratios have been developed?

C. 1. Can you give examples of ratios measuring solvency, efficiency and profitability?

Ex. 2. Give derivatives of:

 

management n effectively adv maintain v acquisition n

behave v expose v determine v control v

convince v relationship n quote v indicate v

profit n assess v analysis n measure n

receive v debt n risk n turn v

replacement n invest v pay back v total n

Ex. 3. Find English equivalents for the following Russian phrases from the text:

 

A. управление финансовой деятельностью; на выгодных условиях; эффективно использовать финансовые средства; приобретать активы; необходимые наличные средства; слияния и поглощения; дивидендная политика; быть подверженным риску; управление основными средствами; управление текущими активами; управление оборотными средствами; управление краткосрочными обязательствами; управление дебиторской задолженностью; управление запасами; структура капитала; финансовая отчетность; балансовый отчет; отчет о прибылях и убытках; основные средства; оборотные средства; счета дебиторов; векселя к получению; незавершенное производство; закладная; кредиторская задолженность; векселя к оплате; начисленные издержки; доходы будущих лет; оплаченная часть акционерного капитала; нераспределенная прибыль; собственный капитал; основные фонды; оборотный капитал;

B. финансовые коэффициенты; отношение рыночной цены (акции) к чистой прибыли компании; отношение задолженности к собственному капиталу; коэффициент ликвидности; коэффициенты, характеризующие долю заемных средств в совокупном капитале компании; коэффициент доходности; прибыль от продаж;

С. кредитный и инвестиционный анализ; вести дела эффективно; оценивать результаты; платежеспособность; выполнять краткосрочные обязательства; отношение оборотного капитала к краткосрочным обязательствам; соотношение собственных и заемных средств; иметь отношение к чему-л.; удовлетворять потребности в наличных средствах; оборачиваемость товарных запасов; скорость оборота...; существенно отличаться; доход от акций; доход от имущества; окупаемость инвестиций; быть подверженным риску.

Ex. 4. Say in a few words what the main text is about. Use the opening phrases from Ex. 4 (Unit 1).