BCOR 2200 Chapter 18

BCOR 2200 Chapter 18 - Chapter 18 International Financial Management 1 Overview Understand how exchange rates are quoted and what they mean

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1 Chapter 18 International Financial Management
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2 Overview Understand how exchange rates are quoted and what they mean Understand currency appreciation and depreciation Know the difference between spot and forward rates Understand Purchasing Power Parity Interest rate parity The implications for changes in exchange rates Understand how exchange rate risk can be managed Understand the impact of political risk on international business investing
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3 Outline Exchange Rates, Quotes and Relative Currency values Purchasing Power Parity Political Risk Some Terminology Forward Rates and Forward Pricing The No-Arbitrage Condition We won’t cover this in this class but I have provided the slides
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4 International Considerations Must consider exchange rates when operating in more than one currency Sell your product and receive Euros, but must pay suppliers, employees, bondholders and stockholders in dollars. Political risk associated with actions of foreign governments Nationalization (the Government takes your stuff) But there may be more financing opportunities Consider the international capital markets Borrow in Europe to finance European operations This may reduce the firm’s cost of capital
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5 Exchange Rates Quoted as a ratio: 1.47 $/€ This is the number of dollars needed to buy 1 euro 0.68 €/$ This is the number of Euros needed to buy 1 dollar Which is more valuable, the dollar or the euro? Note that these numbers are reciprocals: 0.68 = 1/1.47 1.47 = 1/0.68 Exchange rates can be confusing We always think about the number of dollars per unit Dollars per gallon of gas Dollars per month rent Dollars per keg Never “gallons per dollar” or “months per dollar” But currency markets quote both ways
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6 Exchange Rates Quotes Large Financial Intermediaries (banks) stand ready to exchange currencies Right now at the “Spot Rate” Or at some point in the future at a “Forward Rate” The banks quote 2 prices: the bid and the ask 1.46 $/€ and 1.48$/€ If I want to buy 1€ , I will have to pay $1.48 If I want to sell 1€ , I will get $1.46 0.6849 €/$ and 0.6757 €/$ If I want to sell $1 , I will get 0.6757 €’s This is the same as buying 06757 €’s for $1 If I want to buy $1 , I will have to pay 0.6849 €’s This is the same as selling 0.6849 €’s for $1 In reality, the spread is much narrower: 1.4695 $/€ and 1.4700 $/€ 0.6805 €/$ and 0.6803 €/$ It is a very competitive market
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This note was uploaded on 12/06/2010 for the course BCOR 2200 at Colorado.

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BCOR 2200 Chapter 18 - Chapter 18 International Financial Management 1 Overview Understand how exchange rates are quoted and what they mean

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