IFIMAN-B+Discussion+Class+Slides+Session+1

# IFIMAN-B+Discussion+Class+Slides+Session+1 - INTERNATIONAL...

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INTERNATIONAL FINANCIAL MANAGEMENT IFIMANB Spring Honours School 4 October 2010 Sunnyside Campus Facilitated by Prof D Makina Department of Finance, Risk Management and Banking, UNISA

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Exam Format of IFIMAN-B Paper Four (4) Compulsory Questions (answers to be provided on the exam script itself). Computation and Decision-making of type Questions relevant for financial managers working for multinational corporations. International finance is an integrated course requiring understanding of all concepts covered in study material.
Topics for Discussion 1. Relationship between interest rates, exchange rates and inflation rates Concept of arbitrage Interest rate parity Purchasing power parity International fisher effect 2. Management of exchange rate risk 3. Financing decisions of MNCs

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IFIMAN-B Session 1 Lecture Outline Relationship between Interest rates, Exchange rates and Inflation rates International Arbitrage (realignment of exchange rates) Locational Arbitrage Triangular Arbitrage Covered Interest Arbitrage Interest Rate Parity Purchasing Power Parity (PPP) International Fisher Effect (IFE)
Locational Arbitrage Locational arbitrage is possible when a bank’s buying price (bid price) is higher than another bank’s selling price (ask price) for the same currency. Example: Bank A Bid Ask Bank B Bid Ask NZ\$ \$0.635 \$0.640 NZ\$ \$0.645 \$0.650 Given \$1m how can you make a profit?

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Profiting from Locational Arbitrage You start with \$1m as your investment Buy NZ\$ from Bank A @ \$0.640 to obtain (\$1,000,000/0.640) = NZ\$1,562,500 Sell NZ\$1,562,500 to Bank B @ \$0.645 to obtain (NZ\$1,562,500 x 0.645) = \$1,007,812.50 Profit = End value- Investment = \$1,007,812.50 - \$1,000,000 =\$7,812.50
International Arbitrage Triangular arbitrage is possible when a cross exchange rate quote differs from the rate calculated from spot rates. Example:

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## This note was uploaded on 10/21/2010 for the course ERW 12212222 taught by Professor Marks during the Spring '10 term at Charleston.

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IFIMAN-B+Discussion+Class+Slides+Session+1 - INTERNATIONAL...

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