EFN406 Lecture 11 2009

EFN406 Lecture 11 2009 - Click to edit Master subtitle...

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Unformatted text preview: Click to edit Master subtitle style 2009 EFN406 Managerial Finance EFN406 Managerial Finance 11 Introduction to International Finance 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 22 Reading Chapter 20 of PBEHP Concentrate on the topics listed on the next slide Sections20.5, 20.8 and 20.9 should be read lightly 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 33 INTERNATIONAL FINANCE 1. Introduction 2. The Foreign Exchange Market 3. International Parity Relationships 4. Management of Exchange Rate Risk 5. International Diversification 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 44 Introduction The study of international finance has become more relevant because 1. Corporations may have overseas subsidiaries, trade in foreign countries and source their capital from overseas 2. Investors may have substantial holdings of overseas shares and bonds 3. Many countries have adopted a floating exchange rate regime and allow free movement of funds (deregulated markets) 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 55 The Foreign Exchange Market 1. Spot Exchange Rate Exchange Rate of one currency for another with immediate delivery Example AUD = 0.8655 USD Spread buy/sell 1. Forward Exchange Rate Exchange Rate of one currency for another at a rate agreed today with delivery at a specified future date 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 66 Exchange Rates 1. An exchange rate by definition involves 2 currencies 2. The currency that is being priced may be referred to as the commodity currency. This is the currency that is expressed as the unit ; such as $1 Australian. A$1 = 0.3767 3. The A$1 is the commodity or unit currency (because it is expressed as a full unit) The is the terms currency; because the A$1 is priced in terms of the 4. Apart from an exchange involving 2 currencies ; there are 2 parties involved in the transaction: a buyer and a seller 5. Therefore there are a total of 4 types of calculation you need to be concerned with 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 77 US $ dollars Customer sells US$ & buys A$1 at 0.7800 Type 1 : obtain A$ using US$ US person may wish to obtain A$10 000 . How many US$ are needed?...
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EFN406 Lecture 11 2009 - Click to edit Master subtitle...

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