Econ306Lecture4 - International Economics II Lecture Notes...

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Unformatted text preview: International Economics II Lecture Notes 4 Alper Duman July 10, 2009 Alper Duman International Economics II Lecture Notes 4 Foreign Exchange Market I Even if general public can acquire FX immediately, bulk of the transactions takes place within two business days, called VALUE DATE. I Banks and other financial institutions make profit through RETAIL SPREAD or RETAIL TRADING MARGIN. Note that banks buy FX from the general public at a discounted value. I In most of the cases actors need FX or local currency at a later date. Then actors engage in the forward market. Alper Duman International Economics II Lecture Notes 4 I Assume a Turkish firm agreed for a contract that specifies import of 100 Cisco servers at a price of 10,000 dollars each in 6 months time. I Given the spot exchange rate, say 1.50TL/$ the firm can now obtain 1 million dollars now in exchange of 1.5 million TL. I Alternatively the firm can wait till the end of th 6-months period with an expectation that TL will appreciate and thus it will be less costly to have access to 1 million dollars. I The firm is takinf an UNCOVERED or OPEN POSITION Alper Duman International Economics II Lecture Notes 4 If instead the firm decides to hedge istself then there are different ways to hedge 1. As it is argued one way is diretly obtaining 1 million $ and deposit at a bank in US (or in Turkey) for a given interest rate. This may involve transaction costs....
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Econ306Lecture4 - International Economics II Lecture Notes...

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