Int Fin ch 3, 4 & 5

you pay todays price.

the current rate of exchange

The most heavily traded currencies are those that are the most liquid

1. Competitiveness of Quote: banks make money by buying a bid price and selling at ask.
2. Special Relationship with Bank
3. Faster Transactions
4. Advice about current market conditions
5. Forecasting Advice

(Ask -Bid) / Ask

(Debt/TTL)(Rd)(1-tax) + (Equity/TTL)(Re)

1. Order Costs
2. Inventory Costs
3. Competition
4. Currency Risk
5. Volume
6. Liquidity

Dollars per one unit of foreign currency. 1/indirect quote

foreign currency units per $1. 1/direct quote

;^)

agreement to trade a certain amount of a particular currency at a locked in exchange rate at a particular time. Are negotiated with banks.

like forwards but traded

option to buy at a certain price: call
option to sell to sell at a certain price: put

dollar deposited in European Banks

deregulation of Europe

riskier assets require greater reserves

Operational Risk accounted for

Numerous banks participate in giving loan.

An american MNC sell a bond in china denominated in dollars. Or a Japanese MNC offers bonds in the US denominated in Yen
- typically callable
- issued in bearer form

American bond offers a bond in England denominated in pounds. Or Japanese sell bonds in Germany denominated in Euros.

ADR = shares per ADR X Price of share X spot rate currency

;>p

;^p

a highly liquid currency will not be a likely to be highly effected by a large transaction as an illiquid currency. Illiquid currencies are more volatile.

as price goes up, supply goes up
;>/

As price goes down, demand goes up

- relative inflation rates
- relative interest rates
- relative income level
- government controls
- expectations of future exchange rates

suppose inflation rates rise more in the US than in the UK. So prices of American goods increase more than British goods. The British will import less American goods, and thus the supply of pounds in the US will be lower. The US will import more British goods, making the supply of dollars in the UK higher.

ADR = shares per ADR X Price of share X spot rate currency

If interest rates are higher in the US, this means US banks are paying higher interest rates. So British investors would take their pounds out the British bank, sell the pounds and buy dollars to invest in US banks. This means the supply of pounds will increase (supply line will shift left). American investors will be less enthusiastic about having pounds in British banks invested, and so demand will decrease (demand curve shifts left). See notes for graph

US income increases while UK income stays the same. US demand for British imports increases. So demand for British pounds increases (demand curve shifts right). The supply curve does not move because the British income stayed the same. See notes for graph

1. imposing foreign exchange barriers,
2. imposing foreign trade barriers,
3. intervening (buying and selling currencies) in the foreign exchange markets,
4. affecting macro variables such as inflation, interest rates, and income levels

Agreement between a corporation and a commerical bank to exchange a specified amount of a currency at a specified exchanger rate (called forward rate) on a specified date in the future.

Bid: what the bank buys for
Ask: What the bank sells for

Difference between bid and ask prices

F=S(1+P) or P=(F/S) - 1
F= Forward Rate
S= Spot Rate
P= Premium

non deliverable forward contract. Often used in emerging markets.

right to by a currency at a predetermined price

right to sell a currency at a predetermined price

can be exercised only on the date of maturity

can be exercised any time up to the date of maturity

When it is "in the money."

- X - S (strike price minus spot rate) As the difference between strike and spot increases so does the premium
- T= time to maturity: as T increase, so does the premium
- volatility: as V increases, so does premium

- (S-X) as S-X decreases, the premium increases
- as volatility increases, premium increases
- as Time to maturity increases, premium increases

to hedge future payables

to hedge future receivables.