194 EXAMPLE 78 Assume the following: Computing IRR and NPV at 10% gives the following different rankings: The difference in ranking between the two methods is caused by the methods’ reinvestment rate assumptions. The IRR method assumes Project A’s cash inflow of $120 is reinvested at 20% for the subsequent 4 years and the NPV method assumes $120 is reinvested at 10%. The correct decision is to select the project with the higher NPV (Project B), since the NPV method assumes a more realistic reinvestment rate, that is, the cost of capital (10% in this example). To calculate Project A’s MIRR, first, compute the project’s terminal value at a 10% cost of capital. 120 T1(10%, 4 years) = 120 × 1.4641 = 175.69 Next, find the IRR by setting: Now we see the consistent ranking from both the NPV and MIRR methods as shown above. Note: Microsoft Excel has a function MIRR(values, finance_rate, reinvest_rate). See also INTERNAL RATE OF RETURN; NET PRESENT VALUE. MONETARY APPROACH See ASSET MARKET MODEL. MONETARY ASSETS AND LIABILITIES See MONETARY BALANCE. MONETARY BALANCE Monetary balance refers to minimizing accounting exposure . It involves avoiding either a net receivable or a net payable position. If an MNC had net positive exposure (more monetary assets than liabilities), it could use more financing from foreign monetary sources to balance things out. MNCs with assets and liabilities in more than one foreign currency may try to Cash Flows Year Projects 0 1 2 3 4 5 A ($100) $120 B ($100) $201.14 Projects IRR NPV at 10% A 20% $9.01 B 15 24.90 100 175.69 T3 MIRR, 5 years()= T3 100/175.69 0.5692, which g ives MIRR about 12%== = MONETARY APPROACH SL2910_frame_CM.fm Page 194 Thursday, May 17, 2001 9:06 AM 195 reduce risk by balancing off exposure in the different countries. Often, the monetary balance is practiced across several countries simultaneously. Monetary assets and liabilities are those items whose value, expressed in local currency, does not change with devaluation or revalu- ation. They are listed in Exhibit 80. A firm’s monetary balance can be looked at in terms of a firm’s position with regard to real assets. For example, the basic balance sheet equation can be written as follows: Monetary assets + Real assets = Monetary liabilities + Equity EXAMPLE 79 Consider the following two cases: Firm A is a monetary creditor because its monetary assets exceed its monetary liabilities; its net worth position is negative with respect to its investment coverage of net worth by real assets. In contrast, Firm B is a monetary debtor because it has monetary liabilities that exceed its monetary assets; its net worth coverage by investment in real assets is positive. Thus, the monetary creditor can be referred to as a firm with a negative position in real assets, and the monetary debtor as a firm with a positive position in real assets. Exhibit 81 summarizes these equivalent relationships. EXHIBIT 80 Monetary Assets and Liabilities Monetary Assets Monetary Liabilities Cash Accounts payable Marketable securities Notes payable Accounts receivable Tax liability reserve Tax refunds receivable Bonds Notes receivable Preferred stock Prepaid insurance Monetary Assets + Real Assets = Monetary Liabilities + Equity (Net Worth) Firm A: Monetary creditor $7,000 $4,000 $5,000 $7,000 Firm B: Monetary debtor 5,000 7,000 7,000 5,000 EXHIBIT 81 Monetary Creditor versus Monetary Debitor Firm A (Long position Monetary Monetary assets Negative position Balance of receipts in foreign creditor exceed monetary in real assets in foreign currency currency) liabilities obligations in foreign currency is positive Firm B (Short position Monetary Monetary liabilities Positive position Balance of receipts in in foreign debtor exceed monetary in real assets foreign currency less currency) assets obligations in foreign currency is negative MONETARY BALANCE SL2910_frame_CM.fm Page 195 Thursday, May 17, 2001 9:06 AM 196 Thus, if Firm A has a long position in a foreign currency, on balance it will be receiving more funds in foreign currency, or it will have a net monetary asset position that exceeds its monetary liabilities in that currency. The opposite holds for Firm B, which is in a short position with respect to a foreign currency. Hence the analysis with respect to a firm with net future receipts or net future obligations can be applied also to a firm’s balance sheet position. A firm with net receipts is a net monetary creditor. Its foreign exchange rate risk exposure is vulnerable to a decline in value of the foreign currency. On the contrary, a firm with future net obligations in foreign currency is in a net monetary debtor position. The foreign exchange risk exposure it faces is the possibility of an increase in the value of the foreign currency. In addition to the specific actions of hedging in the forward market or borrowing and lending through the money markets, other business policies can help the firm achieve a balance sheet position that minimizes the foreign exchange rate risk exposure to either currency devaluation or currency revaluation upward. Specifically, in countries whose currency values are likely to fall, local management of subsidiaries should be encouraged to follow these policies: 1. Never have excessive idle cash on hand. If cash accumulates, it should be used to purchase inventory or other real assets. 2. Attempt to avoid granting excessive trade credit or trade credit for extended periods. If accounts receivable cannot be avoided, an attempt should be made to charge interest high enough to compensate for the loss of purchasing power. 3. Wherever possible, avoid giving advances in connection with purchase orders unless a rate of interest is paid by the seller on these advances from the time the subsidiary—the buyer—pays them until the time of delivery, at a rate sufficient to cover the loss of purchasing power. 4. Borrow local currency funds from banks or other sources whenever these funds can be obtained at a rate of interest no higher than U.S. rates adjusted for the anticipated rate of devaluation in the foreign country. 5. Make an effort to purchase materials and supplies on a trade credit basis in the country in which the foreign subsidiary is operating, extending the final date of payment as long as possible. The reverse polices should be followed in a country where a revaluation upward in foreign currency values is likely to transpire. All these policies are aimed at a monetary balance position in which the firm is neither a monetary debtor nor a monetary creditor. Some MNCs take a more aggressive position. They seek to have a net monetary debtor position in a country whose exchange rates are expected to fall and a net monetary creditor position in a country whose exchange rates are likely to rise. See also CURRENCY RISK MANAGEMENT; TRANSLATION EXPOSURE. MONETARY/NONMONETARY METHOD The monetary/nonmonetary method is a translation method that applies the current exchange rate to all monetary assets and liabilities, both current and long term, while all other assets (physical, or nonmonetary, assets) are translated at historical rates. In contrast with the current/noncurrent method , this method rewards holding of physical assets under devaluation. See also CURRENT RATE METHOD; CURRENT/NONCURRENT METHOD; TEMPO- RAL METHOD. MONEY-MARKET HEDGE Also called credit-market hedge , a money-market hedge is a hedge in which the exposed position in a foreign currency is offset by borrowing or lending in the money market. It basically calls for matching the exposed asset (accounts receivable) with a liability (loan MONETARY/NONMONETARY METHOD SL2910_frame_CM.fm Page 196 Thursday, May 17, 2001 9:06 AM 197 payable) in the same currency. An MNC borrows in one currency, invests in the money market, and converts the proceeds into another currency. Funds to repay the loan may be generated from business operations, in which case the hedge is covered. Or funds to repay the loan may be purchased in the foreign exchange market at the spot rate when the loan matures, which is called an uncovered or open edge. The cost of the money-market hedge is determined by differential interest rates. EXAMPLE 80 XYZ, an American importer enters into a contract with a British supplier to buy merchandise for £4,000. The amount is payable on the delivery of the good, 30 days from today. The company knows the exact amount of its pound liability in 30 days. However, it does not know the payable in dollars. Assume that the 30-day money-market rates for both lending and borrowing in the U.S. and U.K. are .5% and 1%, respectively. Assume further that today’s foreign exchange rate is $1.50/£. In a money-market hedge, XYZ can make any of the following choices: 1. Buy a one-month U.K. money-market security, worth £4,000/(1 + .005) = £3,980.00. This investment will compound to exactly £4,000 in one month. 2. Exchange dollars on today’s spot (cash) market to obtain the £3,980. The dollar amount needed today is £3,980.00 × $1.50/£ = $5,970.00. 3. If XYZ does not have this amount, it can borrow it from the U.S. money market at the going rate of 1%. In 30 days XYZ will need to repay $5,970.00 × (1 + .01) = $6,029.70. Note: XYZ need not wait for the future exchange rate to be available. On today’s date, the future dollar amount of the contract is known with certainty. The British supplier will receive £4,000, and the cost of XYZ to make the payment is $6,029.70. MONEY MARKETS Money markets are the markets for short-term (less than 1 year) debt securities. Examples of money-market securities include U.S. Treasury bills, federal agency securities, bankers’ acceptances, commercial paper, and negotiable certificates of deposit issued by government, business, and financial institutions. See FINANCIAL MARKETS. MORGAN GUARANTY DOLLAR INDEX See CURRENCY INDEXES; DOLLAR INDEXES. MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA, FAR EAST INDEX See EAFE INDEX. MORGAN STANLEY EAFE INDEX See EAFE INDEX. MULTIBUYER POLICY See EXPORT-IMPORT BANK. MULTICURRENCY CROSS-BORDER CASH POOLING Multicurrency cross-border cash pooling allows a facility to notionally offset debit balances in one currency against credit balances in another. For example, a corporation with credit balances in British pounds and debit balances in German marks and French francs can use MULTICURRENCY CROSS-BORDER CASH POOLING SL2910_frame_CM.fm Page 197 Thursday, May 17, 2001 9:06 AM 198 pooling to offset the debit and credit balances without the administrative burden of physically moving or converting currencies. The concept of centralized cash pooling is to offset debit and credit balances within a currency and among different currencies without converting the funds physically. Without a centralized pooling system, local subsidiaries lose interest on credit balances or incur higher interest expense on debit balances due to the high margins on interest rates usually taken by local banks. In many cases, credit balances in foreign currency accounts do not earn interest. Through centralized pooling, cash-rich entities pledge their balances so that entities that need to overdraw their cash pool accounts can do so. Credits in one currency may be used to offset debits in another prior to interest calculations—a strategy that often decreases the net amounts borrowed and increases interest yields. The multicurrency system is managed per account on a daily basis. Pooling is based on a zero-balance con- cept—the volume of credit balances equals the volume of debit balances. When the overall position of all the cash pool accounts is zero or positive, the subsidiaries that are in an overdraft position will actually borrow at credit interest terms. Note: Cash pooling does not eliminate natural interest rate differences between currencies, but it does eliminate the margins on debit balances, thus reducing borrowing costs. Exhibit 82 summarizes goals of the system. The following example illustrates both the advantages of cash pooling and the return edge provided by a multicurrency approach. EXAMPLE 81 Assume that three subsidiaries operating in Australia, the United Kingdom, and the United States maintain multicurrency accounts in the pool. Each has signed an offset agreement with its Amsterdam-based pooling bank. The U.K. company has a local non-interest-bearing DM account. The interbank interest rates are 7.5% for Australian dollars, 4.25% for Deutsche marks, and 5.5% for U.S. dollars. The Australian company’s excess funds in A$ are transferred to its pooling account. The U.K. company has a receivable in DM and has instructed the payor to make the payment directly to its DM pooling account. These pooled credit balances allow other pool members to overdraft their accounts in their preferred currency. For example, the U.S. pooling participant can overdraft its US$ account the countervalue of the available pool balance for investment. Because the overall pooled balance is positive, the pooling mechanism applies credit conditions to all balances in the pool, including debit balances. Consequently, borrowings from the pool are charged interest at credit rates. The positive effect of the pooling is apparent for the U.K. company, which earns interest on its DM balance at 4.25%. Without pooling, no interest would have been earned. Additionally, the U.S. company can borrow from the pool at a rate of 5.5%, which is a credit interest rate. See also NETTING; MULTILATERAL NETTING. EXHIBIT 82 Reasons for Setting up Cross-Currency Cash Pooling Systems Optimizing the use of excess cash Reducing interest expense and maximizing interest yields Reducing costly foreign exchange, swap transactions, and intercompany transfers Minimizing administrative paper work Centralizing and speeding information for tighter control and improved decision making MULTICURRENCY CROSS-BORDER CASH POOLING SL2910_frame_CM.fm Page 198 Thursday, May 17, 2001 9:06 AM 199 MULTICURRENCY INTEREST-COMPENSATING DAILY ACCOUNT-MANAGEMENT SYSTEM The multicurrency interest-compensating daily account-management system (MIDAS) works as follows: Each participating entity sets up its own account(s) at the bank—multicurrency accounts, in many cases, for units that conduct business in more than one currency. Once participating entities open accounts, they must sign offset agreements that permit credit balances in their accounts to be applied against debit balances in sister accounts without transaction approval. The overall net balance should be positive. The overall gain created may be credited to a separate treasury account or allocated among participants according to formulas that take into account participation incentives as well as tax criteria. MULTILATERAL NETTING Multilateral netting is an extension of bilateral netting. Under bilateral netting, if a Japanese subsidiary owes a British subsidiary $5 million and the British subsidiary simultaneously owes the Japanese subsidiary $3 million, a bilateral settlement will be made a single payment of $2 million from the Japanese subsidiary to the British subsidiary, the remaining debt being canceled out. Multilateral netting is extended to the transactions between multiple subsidiaries within an international business. It is the strategy used by some MNCs to reduce the number of transactions between subsidiaries of the firm, thereby reducing the total transaction costs arising from foreign exchange dealings with transfer fees. It attempts to maintain balance between receivables and payables denominated in a foreign currency. MNCs typically set up multilateral netting centers as a special department to settle the outstanding balances of affiliates of a multinational company with each other on a net basis. It is the development of a “clearing house” for payments by the firm’s affiliates. If there are amounts due among affiliates they are offset insofar as possible. The net amount would be paid in the currency of the transaction. The total amounts owed need not be paid in the currency of the transaction; thus, a much lower quantity of the currency must be acquired. Note that the major advantage of the system is a reduction of the costs associated with a large number of separate foreign exchange transactions. See also MULTICURRENCY CROSS-BORDER CASH POOLING. MULTINATIONAL CAPITAL BUDGETING See ANALYSIS OF FOREIGN INVESTMENTS. MULTIPERIOD RETURNS See ARITHEMATIC AVERAGE RETURN VS. COMPOUND (GEOMETRIC) AVERAGE RETURN. MULTIPERIOD RETURNS SL2910_frame_CM.fm Page 199 Thursday, May 17, 2001 9:06 AM 200 N NEAR MONEY Liquid assets easily convertible into money as needed such as marketable securities, money- market funds, and time deposits. NEGOTIABLE INSTRUMENT Any financial instrument that can readily be converted into cash. It is a written draft or promissory note, which is signed by the maker or drawer, has an unconditional promise, and is an order to make payment of a certain sum of money on demand by the bearer or to the order of a named party at a determinable future date. A “holder in due course” of a negotiable instrument is entitled to payment despite any personal disagreements between drawee and drawer. NEGOTIABLE LETTER OF CREDIT A letter of credit issued in such form that it allows any bank to negotiate the documents. Negotiable credits incorporate the opening bank’s engagement, stating that the drafts will be duly honored on presentation, provided they comply with all terms of the credit. NET LIQUIDITY BALANCE See OFFICIAL SETTLEMENTS BALANCE. NET PRESENT VALUE Net present value (NPV) is the excess of the present value (PV) of cash inflows generated by the project over the amount of the initial investment (I). The present value of future cash flows is computed using the so-called cost of capital (or minimum required rate of return) as the discount rate. where − Ι = the initial investment or cash outlay, CF t = estimated cash flows in t ( t = 1,… T ), and k = the discount rate on those cash flows. When cash inflows are uniform, the present value would be PV = CF ⋅⋅ ⋅⋅ T 4 ( k , t ) where CF is the amount of the annuity. The value of T 4 is found in Exhibit 4 of the Appendix. Decision rule : If NPV is positive, accept the project. Otherwise reject it. EXAMPLE 82 Consider the following foreign investment project: Initial investment ( I ) $12,950,000 Estimated life 10 years Annual cash inflows ( CF ) $3,000,000 Cost of capital 12% NPV I CF t 1 k+() t t=1 T ∑ +–= SL2910_frame_CN.fm Page 200 Thursday, May 17, 2001 9:07 AM 201 Since the NPV of the investment is positive, the investment should be accepted. The advantages of the NPV method are that it obviously recognizes the time value of money, and it is easy to compute whether the cash flows form an annuity or vary from period to period. Spreadsheet programs can be used in making NPV calculations. For example, the Excel formula for NPV is NPV (discount rate, cash inflow values) + I , where I is given as a negative number. NETTING Netting involves the consolidation of payables and receivables for one currency so that only the difference between them must be bought and sold. Centralization of cash management allows the MNC to offset subsidiary payments and receivables in a netting process. See also MULTILATERAL NETTING. NET TRANSACTION EXPOSURE Net transaction exposure takes into account cash inflows and outflows in a given currency to determine the exposure after offsetting inflows against outflows. NEW ECONOMY See OLD ECONOMY VERSUS NEW ECONOMY. NOMINAL EXCHANGE RATE Actual spot rate of foreign exchange, in contrast to real exchange rate , which is adjusted for changes in purchasing power. NONDELIVERABLE FORWARD CONTRACTS Nondeliverable forward contracts (NDFs) are forward contracts that do not result in actual delivery of currencies. Instead, the agreement specifies that a payment is made by one party to the other party based on the exchange rate at the future date. NONDIVERSIFIABLE RISK Also called unsystematic risk or uncontrollable risk , nondiversifiable risk is that part of a security’s risk that cannot be diversified away. It includes market risk that comes from factors systematically affecting most firms (such as inflation, recessions, political events, and high interest rates). See also CAPITAL ASSET PRICING MODEL. The net present value of the cash inflows is: PV = CF × T 4( k , t ) = $3,000,000 × T 4(12%,10 years) = $3,000,000 (5.650) $16,950,000 minus Initial investment ( I ) − 12,950,000 Net present value ( NPV = − I + PV ) $4,000,000 Year 0 12345678910 2,950,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 NPV = $4,000.67 NONDIVERSIFIABLE RISK SL2910_frame_CN.fm Page 201 Thursday, May 17, 2001 9:07 AM 202 NONDOCUMENTARY LETTER OF CREDIT Also called a clean letter of credit , this letter of credit for which no documents need to be attached to the draft is normally used in transactions other than commercial ones. See also DOCUMENTARY LETTER OF CREDIT; LETTERS OF CREDIT. NONSTERILIZED INTERVENTION Unlike sterilized intervention in the foreign exchange market, nonsterilized intervention does not adjust for the change in money supply. See also STERILIZED INTERVENTION. NOSTRO ACCOUNT A nostro account is working balances maintained with the correspondent to facilitate delivery and receipts of currencies. NOTE ISSUANCE FACILITY Note issuance facility (NIF) is a facility provided by a syndicate of banks that allows borrowers to issue short-term notes (typically of three- or six-months’ maturity) in their own names. A group of underwriting banks guarantees the availability of funds to the borrower by purchasing any unsold notes or by providing standby credit. Borrowers usually have the right to sell their notes to the bank syndicate at a price that yields a prearranged spread over LIBOR . NONDOCUMENTARY LETTER OF CREDIT SL2910_frame_CN.fm Page 202 Thursday, May 17, 2001 9:07 AM 203 O OFFER Also called ask or sell , the rate at which a trader is willing to sell a foreign currency or other securities. OFFICIAL RESERVE TRANSACTIONS BALANCE The official reserve transaction balance shows an adjustment to be made in official reserves for the balance of payments to balance. OFFICIAL SETTLEMENTS BALANCE Also called overall balance or net liquidity balance , the official settlements balance is the bottom line balance of payments when all private sector transactions have been accounted for and all that remain are official exchanges between central banks (and the IMF ). It is equal to changes in short-term capital held by foreign monetary agencies and official reserve asset transactions. This balance is a comprehensive balance often used to judge a nation’s overall competitive position in terms of all private transactions with the rest of the world. Exhibit 83 summarizes this and other commonly used balance of payments measures. See also BASIC BALANCE; CURRENT ACCOUNT BALANCE. OFFSHORE BANKING Offshore banking means accepting deposits and making loans in foreign currency, i.e., the Eurocurrency market , although the activity is not limited to Europe. The terms offshore, overseas, and foreign are frequently used interchangeably. OFFSHORE MUTUAL FUND A mutual fund that is managed and resides out of a foreign country, usually outside the U.S. EXHIBIT 83 Commonly Used Balance of Payments Measures Group Category Component Popular Name A Merchandise Trade Other Current Items Current Account Current Balance ( A ) B Direct Investment Portfolio Investment Other Long-Term Items Long-Term Capital Basic Balance ( A + B ) C Short-Term Capital D Errors and Omissions Official Settlements Account ( A + B + C + D ) SL2910_frame_CO.fm Page 203 Thursday, May 17, 2001 9:09 AM [...]... Default or Rescheduled 9.38 8 .75 8 .75 6.25 7. 08 7. 50 6.88 8.96 6. 67 7.08 6.88 7. 29 4.38 5.31 0.00 5.83 5.00 6.88 6.04 3 .75 6.25 6.46 5.42 5.83 4.58 10 Credit Ratings 226 POLITICAL RISK 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 54 37 47 51 46 75 50 52 55 53 57 60 58 67 59 66 56 65 64 62 69 63 61 70 68 71 76 73 74 78 77 90 Thailand Bahamas Mauritius South... 59.08 57. 71 57. 48 57. 32 56 .79 56.36 55.69 55.11 54. 97 54.18 53 .75 53.42 53.11 52.95 52.81 52 .74 52.20 51.83 51.31 51.12 50 .79 49. 67 48.88 47. 38 47. 31 46.85 46.32 43.85 43.84 42 .70 14.89 16.50 14.16 13.85 13. 87 15.62 14.19 14.48 13.85 12 .76 12.81 14.10 13 .79 13. 07 12.84 12.86 13.23 14. 07 12.02 15.14 12.49 10.98 12.54 11.69 11.26 10.12 9 .77 10.33 11.22 10 .71 10.25 7. 73 8.55 6.03 11.44 9.51 10.00 10 .71 9.41... Oman Chile Hungary Bahrain Poland Czech Republic Malaysia China Mexico Weighting: 85. 27 83.25 80.65 78 .66 77 .42 76 .62 75 .59 73 . 67 73.28 72 .89 72 .68 68.93 68. 27 68.14 66.84 66.28 66. 17 65.83 65.24 65.20 63.59 63.14 61.11 59 .75 59.68 100 Total Score 21.42 22.21 20.46 20.13 18.22 18.18 18. 07 18. 67 16.35 18.40 16.56 17. 43 16 .74 16.10 16.40 17. 50 15. 57 18.24 17. 06 15.22 16.56 17. 11 15.86 15.64 15.68 25 Political... 13 17 18 20 19 21 Sep-00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Luxembourg Switzerland United States Norway Netherlands Denmark Germany France Austria United Kingdom Finland Sweden Japan Singapore Ireland Belgium Canada Australia Spain Italy Iceland Weighting: 99.02 96.89 94.25 94.24 92.90 92 .77 92 .77 92.33 92.29 91.54 91.38 91.12 90 .70 90.04 89 .71 89.63 89.10 88.01 87. 29 87. 11 86 .72 ... 10 .71 10.25 7. 73 8.55 6.03 11.44 9.51 10.00 10 .71 9.41 9.21 9.31 9. 27 9.58 10.95 7. 90 10.88 8.56 8. 57 7.61 8.54 9.34 9.93 8.66 9.63 8.28 8.49 7. 13 9.18 8.84 7. 29 7. 96 6.85 8.81 8 .76 8.44 10.00 8.90 9.41 8.80 9.43 8.83 9.19 9.61 8.55 7. 68 9.10 9.11 9.20 9.62 8 .76 8 .75 8 .74 8.54 9.82 7. 51 9.29 9.49 9.14 8.64 9.68 9.33 8.62 7. 56 8 .72 9.45 8 .74 10.00 10.00 10.00 10.00 10.00 10.00 10.00 9.90 10.00 10.00 10.00... Euromoney Magazine’s Country Risk Ratings, September 2000 (continued) 14.54 13 .72 14.95 13.35 15.95 13.49 14.59 13 .71 15.45 14.20 13 .70 12.31 10.85 12.20 18.44 12.43 10. 27 10.39 10 .78 10.56 9.92 9.96 10.08 9.46 9.28 25 Economic Performance 10.00 10.00 9. 87 10.00 10.00 9 .76 9.98 10.00 9.64 9.95 9 .74 5.66 9 .79 8.50 10.00 9.05 9.49 8. 67 8.35 10.00 9.26 8.94 8.88 9.58 8.81 10 Debt Indicators 10.00 10.00 10.00... ensure the financial integrity of brokers, clearing members, and the Exchange as a whole See MARGIN PLAIN-VANILLA SWAPS 223 PERFORMANCE BOND CALL Previously referred to as margin call, a demand for additional funds because of adverse price movement See also MAINTENANCE MARGIN PESETA Monetary unit of Spain, Andorra, Balearic Island, and Canary Islands PESO The currency of the following countries: Argentina,... out of the money when P − X > 0 and has no value EXAMPLE 89 Assume a stock has a market price of $100 and a strike price of the put is $116 The value of the put is $1,600 If market price of stock exceeds strike price, an out -of- the money put exists OPTION 211 Because a stock owner can sell it for a greater amount in the market relative to exercising the put, no intrinsic value exists of the out -of- money... Analysis Program and Stock Options Scanner, H&H Scientific, (301) 292-2958 2 An Option Valuator/An Option Writer, Revenge Software, (516) 271 -9556 3 Strategist, Iotinomics Corp., (800) 255-3 374 or (801) 466-2111 OPTION COLLAR 4 5 6 7 219 Option-80, (508) 369-1589 Optionvue IV, Optionvue Systems International, Inc., (800) 73 3-6610 or (70 8) 816-6610 Option Pro, Essex Trading Co., (800) 72 6-2140 or (70 8) 416-3530... strike price of $50 and a premium for the call option of $7 If the stock is below $50, the call would not be exercised, and you earn the $7 premium If the stock is above $50, the call may be exercised, and you must furnish 100 shares at $50 The call writer loses money only if the stock price was above $ 57 M Can You Sell (or Write) an Option on Something You Do Not Own? Naked (uncovered) and covered . follows: Value of put = (exercise price of put – market price of stock) × 100 And the option is out of the money when P − X > 0 and has no value. EXAMPLE 89 Assume a stock has a market price of $100 and. unconditional promise, and is an order to make payment of a certain sum of money on demand by the bearer or to the order of a named party at a determinable future date. A “holder in due course” of a negotiable instrument. of payables and receivables for one currency so that only the difference between them must be bought and sold. Centralization of cash management allows the MNC to offset subsidiary payments and