Interest Rate Risk Management.pdf

•

0 likes•14 views

The document discusses interest rate risk management techniques used by companies. It describes two main types of interest rate risk: mismatching of interest rate bases for assets and liabilities, and mismatching in the timing of repricing interest rate sensitive assets and liabilities. To manage these risks, the document outlines various outright and option based instruments that companies can use, including interest rate swaps, forwards, caps, floors, and collars. The goal is for companies to forecast interest rates and select the appropriate tools to match their assets and liabilities.

Economy & Finance

2
GROWING NEED FOR IRRM
* Volatility
* Increasing use of short
term financing

3
INTEREST RATE RISK
1. BASIC RISK
- Mismatching of interest rate bases for assets and liabilities
in term of :
* Maturity * Denomination * Type
- Typical concern of Financial Firm
2. GAP RISK
- Mismatch timing in reprising interest rate sensitive assets
and liabilities
- Typical concern of Non Financial Firm

4
MANAGEMENT OF
INTEREST RATE RISK
 Interest Rate Forecasting
 Selection of appropriate tools
* Outright Based Instruments
* Option Based Instruments

5
OUTRIGHT BASED INSTRUMENTS
 Mismatched Maturity
 Foreign Currency Forward
Swaps
 Forward Rate Agreement (FRA)
 Interest Rate Swaps
 Currency Swaps

6
1. MISMATCHED MATURITY
 Upward Slope - R long term > R short term
Borrow Short, Invest Long
 Downward Slope - R long term < R short
term
Borrow Long, Invest Short
OUTRIGHT BASED INSTRUMENTS

7
OUTRIGHT BASED INSTRUMENTS
2. FOREIGN CURRENCY FORWARD SWAPS
Combining of two offsetting forwards
with different maturities
Illustration :
German Co will need USD 5,000,000 beginning in 6
months for 6 months period
Technique :
 Buy USD 5,000,000 forward 180 days
 Sell USD 5,000,000 forward 360 days

8
OUTRIGHT BASED INSTRUMENTS
3. FORWARD RATE AGREEMENT (FRA)
- Interbank-traded contract to buy or sell
interest rate payment on a notional principal
- Buyer of FRA obtains the right to effectively
lock in an interest rate for desired term
beginning in the future
- Buy FRA if:
* Interest rate increase and Co will borrow
* Interest rate decrease and Co will invest

9
FORWARD RATE AGREEMENT
Illustration :
USA Co. borrow USD 2,000,000 and buy 90 against 181
days FRA for a notional principal of USD 2,000,000
Agreed rate = 7.5 % Actual rate = 9.0 %
Interest rate payment
USD 2,000,000 x 0.09 x 91/360 = USD 45,500
Seller of FRA will pay
USD 2,000,000 x [(0.09 - 0.075) x 91/360] = USD 7,583.33
CF of USA Co. at end of loan :
Interest rate payment = USD 45,500.00
Cash Inflow from FRA = USD 7,583.33
Net Payment = USD 37,916.67

10
OUTRIGHT BASED INSTRUMENTS
4. INTEREST RATE SWAPS
Fixed interest rate Floating interest rate
Plain Vanilla Swap
Agreement between 2 borrowers to exchange fixed
rate to floating rate

11
PLAIN VANILLA SWAP
Illustration :
Unilever, UK MIC, USA
Available rate : Fixed 9 % Available rate : Fixed 10 %
Float LIBOR + 0.25 LIBOR + 0.75
Prefer borrow float Prefer borrow fixed
9 % 9.875 %
LIBOR LIBOR + 0.75
Advantage : Unilever MIC
Direct Borrowing LIBOR + 0.25 10 %
Interest Rate Swap LIBOR 9.875 %
Saving 0.25 % 0.125 %
Advantage for Citibank = 0.875 - 0.750 = 0.125 %
Unilever,UK MIC, USA
CITIBANK

12
OUTRIGHT BASED INSTRUMENTS
5. CURRENCY SWAPS
Exchange debt service obligation in one
currency for the service on similar debt
denominated in other currency

13
MANAGEMENT OF
INTEREST RATE RISK
 Interest Rate Forecasting
 Selection of appropriate tools
* Outright Based Instruments
* Option Based Instruments

14
OPTION BASED INSTRUMENTS
1. INTEREST RATE CAP
Option to fix a ceiling or maximum short-
term interest rate payment
2. INTEREST RATE FLOOR
Option to fix a floor or minimum short-term
interest rate payment

15
3. INTEREST RATE COLLARS
Simultaneous purchase (or sale) of a cap and
sale (or purchase) of a floor
Similar to Synthetic Forward Hedge
4. SWAPSION
The right but not the obligation to enter into a
swaps on a predetermined notional principal at
some defined future date at specific strike rate
OPTION BASED INSTRUMENTS

16
SUMMARY
for managing debt service
TECHNIQUE I/R I/R
Mismatched Borrow short, Borrow long,
Maturity invest long invest short
FRA Buy FRA Sell FRA
Cap Buy Cap Sell Cap
Floor Sell Floor Do nothing
Collar Buy Collar Sell Collar
I/R Swap Float to fixed Fixed to float

Fixed income instruments provide lower risk returns through interest payments and repayment of principal. They come with various risks like interest rate risk, credit risk, inflation risk. Common fixed income products include treasury bills, government bonds, commercial paper, mortgage backed securities, and various derivatives like interest rate swaps, swaptions, and caps/floors that allow hedging of risks. Understanding the features, risks and types of various fixed income instruments is important.

Swaps pricing and strategies

Babasab Patil

This document discusses interest rate swaps, including defining a basic swap transaction, the gains achieved through swaps, pricing and valuation of swaps, risks and applications of swaps. A basic swap involves two parties exchanging interest rate payment obligations, with one party paying a fixed rate and receiving a floating rate, and vice versa. Swaps allow parties to achieve lower financing costs by exploiting differences in borrowing rates available to higher and lower rated entities. Risks include pricing risk, credit risk, and potential systemic risks from unhedged dealer positions.

capital-chapter25-1.pptx

ShainaBaptista

This document discusses different sources of long-term financing for businesses, including debt and equity. It provides details on term loans, maturity dates, debt financing advantages and disadvantages. Collateral and restrictive covenants for loans are defined. The document also examines corporate bonds, including features, prices, yields, ratings and types. Methods for retiring debt and preferred shares are outlined, along with preferred share features, valuation, advantages and disadvantages. Finally, the key features of ordinary equity shares are compared to preferred shares and debt.

Chap009

mselaoudiy

This document provides an overview of liabilities, including their definition, classification, and key types. It discusses current and noncurrent liabilities, and covers accounts payable, payroll liabilities, notes payable, bonds, leases, and estimated liabilities. It also introduces concepts of present value and its applications in accounting. International differences in refinanced debt classification and borrowing in foreign currencies are highlighted.

first american bank- credit default swaps

Satender Kumar

- First American Bank is considering using a credit default swap to help mitigate Charles Bank International's credit risk in providing a $50 million loan to CapEx Unlimited, a telecommunications company. - Through the CDS, CBI would make periodic fee payments to First American Bank in exchange for credit protection on the loan to CapEx. This would transfer some of the credit risk from CBI to First American Bank. - There are various ways to calculate the appropriate spread for the CDS, including using historical default data or bond prices of comparable companies. The estimated spread would likely be between 1.3-5.5%.

Sg credit derivatives overview

ajohns5

This document provides an introduction to credit derivatives. It defines credit risk and credit deterioration risk as the risks of financial loss due to a borrower defaulting or their credit quality decreasing. Credit derivatives allow investors to transfer these risks. The global market for credit derivatives has grown significantly. Common credit derivative products include credit default swaps, which transfer default risk, total rate of return swaps, which transfer both credit and price risk, and credit spread products. The document discusses the key features and uses of these different credit derivative products.

Interest rate and currency swap q and a

StudsPlanet.com

This document provides solutions to end-of-chapter questions for a chapter on interest rate and currency swaps. It includes answers explaining the difference between a swap broker and dealer, the necessary condition for a fixed-for-floating interest rate swap, basic motivations for currency swaps, and how comparative advantage relates to the currency swap market. It also summarizes the various risks confronting swap dealers and some variants of basic interest rate and currency swaps. Sample problems are provided showing how companies can use swaps to lower their borrowing costs.

Forex Management Chapter - V

Swaminath Sam

This document provides an overview of chapter 6 from a finance textbook on interest rates and bond valuation. It covers various learning goals and topics related to interest rates fundamentals, the term structure of interest rates, risk premiums, features of corporate bonds, bond yields, prices, and ratings. Key concepts discussed include the nominal and real interest rates, theories of the term structure, risk factors that influence bond prices, features of bond issues such as callability and conversion, how bond yields and prices are determined, and the ratings provided by Moody's and S&P. Examples and figures are provided to illustrate various points.

Chapter14 International Finance Management

Piyush Gaur

An interest rate and currency swap dealer faces several types of risk: 1) Interest rate risk from interest rates changing before unplaced swap positions can be laid off. 2) Basis risk when two counterparties reference different floating rate indices. 3) Exchange rate risk from fluctuating currency rates before unplaced positions are laid off. 4) Credit risk from counterparty default. 5) Mismatch risk from finding an exact offsetting position. 6) Sovereign risk if a country restricts a currency, preventing obligations from being honored.

summarized chapter-6-interest-rates-and-bond-valuation.ppt

Mei Miraflor

This document discusses interest rates and bond valuation. It begins by defining interest rates, required returns, and factors that influence interest rates. It then discusses nominal and real interest rates, bond valuation, bond features like call options, and how bond prices are affected by changes in interest rates and risk. The key topics covered are interest rate fundamentals, bond valuation methods, bond price behavior, and interest rate risk for bonds.

Chapter 6.Long -Term Financing-Debt

ZahraMirzayeva

This document discusses sources of long-term financing for businesses. It focuses on debt financing through the issuance of bonds. It describes the basic features of bonds, including par value, coupon rate, maturity date, and current yield. It outlines the roles of trustees and indentures in bond issuances. It also discusses the risks associated with bonds, such as interest rate risk, reinvestment risk, default risk, inflation risk, and liquidity risk. Finally, it covers various types of bonds like zero-coupon bonds, floating-rate notes, junk bonds, convertible bonds, and Eurobonds.

L Pch19

Nguyen Thuy

1) Derivatives derive their value from underlying assets and are used for hedging, speculating, arbitrage, and diversification. 2) Common derivatives include forwards, futures, swaps, and options. Forwards are customized OTC contracts while futures are exchange-traded with standardized terms. 3) Interest rate swaps, currency swaps, and other swap agreements involve exchanges of cash flows between counterparties.

Interest Rates

Qasim Khan

Group 4.pptx

ssuser209977

Int rate and swaps

StudsPlanet.com

This document discusses interest rate and currency swaps. It provides an example of a company, Carlton Corporation, that takes out a floating rate loan and then uses interest rate swaps and currency swaps to manage its interest rate and currency risks. Specifically, it first enters an interest rate swap to exchange its floating rate for a fixed rate. It then enters a currency swap to exchange the cash flows of its debt from US dollars into Swiss francs to match its revenue cash flows. The document explains how these swaps work and how Carlton could unwind the swaps if it wanted to terminate them early. It also briefly discusses counterparty risk associated with swaps.

Real Estate Finance 101: The Basics (Jay Rollins) - ULI Fall Mmeeting 102611

Virtual ULI

The document provides an overview of commercial real estate finance, including: 1) Commercial real estate offers different risk profiles like core, value-added, and opportunistic investments that provide varying returns. 2) Real estate markets and financing conditions fluctuate over time, like between 2007 and 2011 when markets dislocated. 3) Various capital sources like equity, mezzanine loans, and senior debt provide different risk-return profiles for financing properties.

Global derivatives market historical perspective

Rod Medallion

This document discusses various types of derivatives used in global financial markets. It provides examples and explanations of interest rate swaps, total return swaps, and credit default swaps. Interest rate swaps are used to hedge interest rate risk by exchanging fixed rate payments for floating rate payments. Total return swaps transfer the total return of an asset in exchange for interest payments. Credit default swaps provide credit protection on a reference loan, with the protection buyer making periodic payments and receiving a payoff if a credit event occurs.

Bba 2204 fin mgt week 6 bonds

Stephen Ong

This document provides an overview and learning goals for a lecture on interest rates and bonds. It discusses key concepts like the term structure of interest rates, bond yields, prices, and types. It also covers bond valuation basics, factors that influence interest rates, and theories of the term structure. Examples are provided to illustrate expectations theory and the impact of inflation on interest rates. The document reviews corporate bond features, costs, and ratings. Tables present bond characteristics, issuer risks, and rating scales.

FIN Chapter 6_V1.ppt

ssuserbea996

This document discusses interest rates and bond valuation. It begins by defining interest rates as the cost of borrowing funds for debt instruments like bonds, while required returns are the cost of funds for equity instruments like stock. Several factors influence interest rates, including inflation, risk, and liquidity preferences. The real interest rate exists in a hypothetical world without these factors. Nominal interest rates incorporate expected inflation and risk premiums. The term structure of interest rates shows how rates vary by maturity and is depicted through yield curves. Corporate bonds are discussed, including features like coupon rates, par values, and bond ratings.

Derivatives pricing and valuation futres.ppt

HamzaAmin85

What are the Current Dynamics Driving UK Pensions Investment?

Redington

1) The document discusses various strategies and assets for UK pension investment, focusing on liability driven investments (LDI). 2) It provides examples of pension funds that implemented LDI strategies at different times, outlining how their allocations changed in response to market events. 3) The document promotes the use of a Pension Risk Management Framework and "Flight Plan" tool to help pension funds develop clear investment strategies and evaluate opportunities based on their objectives and constraints.

BONDS, BOND VALUATION, AND INTEREST RATES

Salah A. Skaik - MBA-PMP®

This document discusses key topics related to bonds, bond valuation, and interest rates. It begins by outlining topics that will be covered in the chapter, including who issues bonds, bond characteristics, bond valuation, and determinants of market interest rates. The document then defines what a bond is and provides examples of different bond classifications. Several key bond characteristics are defined, such as par value, coupon payment, maturity date, call provisions, and sinking funds. The document also discusses bond valuation methodology and how bond prices are affected by changes in market interest rates. It provides examples to illustrate these concepts. The remainder of the document covers additional topics like bonds with semiannual coupons and different methods for calculating bond yields.

Ch22

Ar-rafi Chowdhury

The document describes key topics related to thrift operations and savings institutions, including sources and uses of funds, types of risk exposure, valuation methods, and the savings and loan crisis of the 1980s. It discusses the sources of funds for savings institutions including deposits, borrowed funds, capital, and mortgage-backed securities. It also outlines the uses of funds such as cash, mortgages, securities, loans, and other investments. The document then evaluates the exposure of savings institutions to liquidity, credit, and interest rate risk and describes methods to manage interest rate risk. It concludes with an overview of the savings and loan crisis in the 1980s and the regulatory response and resolution through the Financial Institutions Reform, Recovery, and Enforcement

ch14.pptx

MostafaGamal216952

This document provides an overview and learning objectives for a chapter on non-current liabilities. It discusses issuing long-term debt through bonds and notes, including different types of bonds, bond valuation at issuance, and accounting for bond discounts and premiums using the effective interest method. It also covers accounting for the extinguishment of non-current liabilities and off-balance sheet financing arrangements.

BONDS

CHARAK RAY

Credit default swap aapu

Fahad Aapu

This document discusses credit default swaps (CDS). A CDS is an agreement where the buyer makes periodic payments to the seller, who agrees to make a payment to the buyer if a loan defaults. CDS can be used to hedge against default risk or speculate on credit risk. They allow entities to transfer default risk to investors willing to bear it. The document outlines the terms of CDS agreements, how they are used for hedging versus speculation, and provides examples of each.

Ch08

LUXSVB

This chapter discusses several factors that influence interest rates: marketability, liquidity, default risk, call privileges, prepayment risk, convertibility, and taxation. It explains how each of these factors affects the promised and expected yields on different types of financial assets. The risk-free interest rate underlies all other interest rates, which are scaled upward depending on their degree of additional risk factors like default risk or prepayment risk.

Introduction to Financial Markets is relevant to course of financial markets ...

MengsongNguon

Research on High School in Cambodia boundary

MengsongNguon

This document provides background information on the history and development of Preah Sisowath High School in Cambodia. It discusses the school's origins in the late 19th century and renaming over time. It also outlines increases in student and teacher populations from 1980 to 2005. The document proposes research on teaching methods of mathematics at the school, with the objectives of identifying strong and weak points to improve education quality. The proposed methodology is to observe mathematics teachers monthly and analyze findings.

Similar to Interest Rate Risk Management.pdf

Chapter 6 interest rate and bond valuation

Michael Ong

Chapter14 International Finance Management

Piyush Gaur

summarized chapter-6-interest-rates-and-bond-valuation.ppt

Mei Miraflor

Chapter 6.Long -Term Financing-Debt

L Pch19

Interest Rates

Group 4.pptx

Int rate and swaps

Real Estate Finance 101: The Basics (Jay Rollins) - ULI Fall Mmeeting 102611

Virtual ULI

Global derivatives market historical perspective

Rod Medallion

Bba 2204 fin mgt week 6 bonds

Stephen Ong

FIN Chapter 6_V1.ppt

ssuserbea996

Derivatives pricing and valuation futres.ppt

HamzaAmin85

What are the Current Dynamics Driving UK Pensions Investment?

Redington

BONDS, BOND VALUATION, AND INTEREST RATES

Salah A. Skaik - MBA-PMP®

Ch22

Ar-rafi Chowdhury

ch14.pptx

MostafaGamal216952

BONDS

CHARAK RAY

Credit default swap aapu

Fahad Aapu

Ch08

LUXSVB

Similar to Interest Rate Risk Management.pdf (20)

Chapter 6 interest rate and bond valuation

Chapter14 International Finance Management

summarized chapter-6-interest-rates-and-bond-valuation.ppt

Chapter 6.Long -Term Financing-Debt

L Pch19

Interest Rates

Group 4.pptx

Int rate and swaps

Real Estate Finance 101: The Basics (Jay Rollins) - ULI Fall Mmeeting 102611

Global derivatives market historical perspective

Bba 2204 fin mgt week 6 bonds

FIN Chapter 6_V1.ppt

Derivatives pricing and valuation futres.ppt

What are the Current Dynamics Driving UK Pensions Investment?

BONDS, BOND VALUATION, AND INTEREST RATES

Ch22

ch14.pptx

BONDS

Credit default swap aapu

Ch08

More from MengsongNguon

Introduction to Financial Markets is relevant to course of financial markets ...

MengsongNguon

Research on High School in Cambodia boundary

MengsongNguon

trends of the MBA students to take MBA program and choose their specificaliza...

MengsongNguon

The document summarizes a research study on trends of MBA students in choosing their program and specialization. Key findings include: - Most students said they took an MBA program to learn more skills or to become a businessman in the future. - Students primarily chose Build Bright University for its qualified lecturers and convenient class times. - When selecting a specialization, most students considered the opportunities available, though some focused on fitting their current work or interests. - The most popular specializations chosen were general management, followed by finance and banking. The researchers recommend the graduate program adapt its curriculum to meet students' skill needs for current jobs and add more value in areas like availability and quality of

customer perception on how to make customer satisfaction for Cambodia Tech in...

MengsongNguon

This document outlines a research study conducted on customer satisfaction at CamboTech Internet Shop in Phnom Penh, Cambodia. The study aimed to identify factors influencing decreasing customer numbers and profits since 2008. A questionnaire was administered to 105 customers to understand perceptions of customer service, price, location, and competitors. Results showed dissatisfaction with internet speed, computer performance, price, and shop appearance. Recommendations included lowering prices, improving technology, and increasing promotion of customer satisfaction surveys.

financial instruments, financial markets, and financial institutions is a fin...

MengsongNguon

This document provides an overview of financial instruments, markets, and institutions. It defines key terms like assets, liabilities, and different types of financial markets. It explains that financial instruments are used for means of payment, storing value, and transferring risk. Financial markets allow for buying and selling of instruments and provide liquidity, communicate information, and enable risk sharing. Financial institutions specialize in issuing securities, screening borrowers, and transforming short term liabilities into long term loans to reduce costs. They play an important role in the financial system by facilitating the flow of funds.

investment decision is a plan to run investment

MengsongNguon

1) Investment decisions depend on whether the expected returns from investment are greater than the cost of borrowing funds or the opportunity cost of other investments. 2) Using the present value calculation, investments should be made if the present value of expected future returns is greater than the initial cost. 3) The interest rate, income level, wage rate, technology, and taxes influence investment levels by impacting the profitability of investments.

production function and aggregate supply is a tool to measure to total supply

MengsongNguon

The aggregate supply curve is derived from the production function and factor markets. In the short run, the AS curve can be upward sloping under wage rigidity or perfectly elastic under price rigidity. In the long run, with wage-price flexibility, the AS curve is perfectly inelastic as output is constant at the full employment level, while money wages and prices adjust to maintain full employment.

entrepreneurship is a business owner to lead a company to achieve the ultima...

MengsongNguon

This document provides an overview of entrepreneurship and entrepreneurial processes. It defines entrepreneurship as the functions performed by entrepreneurs in establishing an enterprise, noting that it involves innovation and risk-bearing. The document then discusses entrepreneurship as a multi-stage process, from generating new product ideas to developing and launching ventures. It also examines barriers to entrepreneurship and emphasizes the importance of environmental analysis, including analyzing political, economic, social, technological, legal, cultural and physical forces that shape opportunities and constraints.

An Economies Analysis of Financial Structure is a tool to analysis on how eco...

MengsongNguon

This document discusses the economic analysis of financial structure and sources of external finance. It summarizes that: 1) Indirect finance through financial intermediaries like banks is a more important source of external business finance than direct finance through securities markets. 2) Asymmetric information problems like adverse selection and moral hazard help explain why intermediation is predominant and why debt is used more than equity. 3) Financial intermediaries help address these problems through tools like monitoring, private information production, and net worth requirements for borrowers.

Money banking add financial markets is a foundation of financial system and b...

MengsongNguon

This document introduces topics in money, banking, and financial markets. It discusses why these topics are studied, including that financial markets channel funds from savers to investors, and banks play a crucial role in money creation. It also outlines how the topics of bonds, stocks, foreign exchange, business cycles, inflation, and monetary/fiscal policy will be covered. The document concludes by explaining the basic analytic framework that will be used, including supply and demand analysis and case studies.

business borrowing corporate is a source of fund for corporate to get capital...

MengsongNguon

This chapter discusses various forms of business borrowing, including corporate bonds, asset-backed securities, bank loans, and commercial mortgages. It examines factors that influence the amount businesses borrow from financial markets. Some key points covered include the characteristics and innovations of corporate debt instruments, the securitization process for asset-backed securities, major investors in corporate debt, and the significant growth in business borrowing levels in recent decades.

the financial information marketplace is a database set to help marketing str...

MengsongNguon

The document discusses sources of financial information and the efficient market hypothesis. It identifies five main sources of information - debt security prices and yields, stock prices and dividend yields, information on security issuers, general economic conditions, and social accounting data. It also discusses the efficient market hypothesis, which argues that financial markets efficiently incorporate all available information into asset prices, and the alternative view of asymmetric information. The document provides examples of different market structures and inefficiencies that can arise from asymmetric information.

Critical forces of Business Environment is an analysis tool to critical thin...

MengsongNguon

The document discusses the internal and external business environment factors that influence international business operations. It defines micro and macro environmental factors, with the micro including suppliers, customers, and competitors, while the macro encompasses broader forces like economic, political, social, and technological factors operating at domestic, foreign, and global levels. Several tables provide economic data on SAARC and ASEAN countries to compare their size, growth rates, and income levels.

Globalization major forces is kind of components of global running business o...

MengsongNguon

Globalization involves integrating economies and removing barriers between nations. It occurs at both the micro level of individual firms expanding globally and the macro level of integrating entire economies. Globalization creates an environment where capital, trade, technology, and labor can flow freely between countries. It allows companies to access new growth opportunities overseas but also increases competition as foreign firms enter domestic markets. Globalization has led to a more integrated and interdependent world economy.

introduction to organizational behavior is a broad knowledge to understand to...

MengsongNguon

This document provides an overview of organizational behavior (OB) including: - Defining OB and how it can help managers understand individual and group behavior within organizations. - The 4 main goals of OB which are to describe, understand, predict, and control human behavior at work. - The 4 key forces affecting OB which are people, structure, technology, and environment. - The 4 disciplinary foundations of OB which are psychology, sociology, social psychology, and anthropology. - The 4 approaches to OB which are human resources, contingency, results-oriented, and systems approaches. - Challenges and opportunities for applying OB concepts like managing a diverse workforce and improving employee performance.

Introduction to international business environment is talking about world bus...

MengsongNguon

The document provides an introduction to international business environment. It defines international business environment as the sum total of factors external to and beyond the control of a firm's management that influence the firm. These factors can be domestic, foreign, or international in nature. It discusses how the business environment has changed from pre-globalization to post-globalization with increasing global competition and integration of markets. It also defines key terms related to international business such as multinational corporations, foreign business, global companies, and discusses trends toward increasing globalization and interdependence between firms and countries.

business unit performance measurement is a way to measure a business performa...

MengsongNguon

This document discusses various performance measures that can be used to evaluate business unit performance, including accounting income, return on investment (ROI), residual income, economic value added (EVA), and issues with using historical costs and net book values. It provides examples of how to calculate ROI and compares using gross book value versus net book value, historical costs versus current costs, and issues with using beginning, ending, or average balances when evaluating performance.

planning and budgeting is a way to set budgeting planning to spending coverin...

MengsongNguon

This document provides an overview of key concepts in planning and budgeting. It discusses how budgets are used to manage resources and cash flows. It also explains the importance of participative budgeting that involves input from employees. The document outlines various steps in budgeting like sales forecasting, production budgeting, developing cash budgets and budgeted financial statements. It discusses budgeting challenges in service organizations and the need for sensitivity analysis to account for uncertainty. Ethical issues that can arise from budgets and performance evaluation are also covered.

fundamentals of management control system

MengsongNguon

This document summarizes key concepts from Chapter 12 of a management control systems textbook. It discusses the role of management control systems in aligning managerial and organizational interests. It also covers topics like the advantages and disadvantages of decentralization, the basic framework for management control systems including elements like performance evaluation and compensation, responsibility accounting and how it relates to organizational structure, evaluating managerial performance using concepts like controllability and relative performance evaluation, analyzing dual-rate versus single-rate corporate cost allocation systems, potential issues with incentive-based performance evaluation systems, and how internal controls can help protect organizational assets.

service department and joint cost allocation

MengsongNguon

The document discusses various methods for allocating costs between service and production departments, including direct, step, and reciprocal methods. It also covers allocating joint costs using the net realizable value and physical quantities methods, and how cost data is used to determine whether to sell a joint product or process it further. By-products are accounted for by either deducting their net realizable value from joint costs or treating proceeds as other revenue. Spreadsheets can be used to solve reciprocal cost allocation problems through simultaneous equations.

More from MengsongNguon (20)