Session1 - Notes Session 1 > > Overview of Exchange Rates...

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Notes - Session 1 >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>> Overview of Exchange Rates Chapter 1: Multinational Financial Management: An Overview Chapter 2: International Flow of Funds >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>> This first lecture (Lecture 1) begins by defining and specifying some of the basic principles of exchange rates. This is followed by a discussion of the key points in Chapters 1 and 2, along with some exercises and problems, with solutions provided. Overview of Exchange Rates If the world had stable foreign exchange rates, your text on international finance would be a much thinner book. Because we live in a world of often rapidly fluctuating exchange rates, one of the core issues of international finance is studying ways the international firm can minimize its risk from exchange rate losses in its international transactions, its international investments and in its repatriation of overseas profits. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>> INDIRECT QUOTE First, let us get some terms clear about exchange rates. Foreign exchange rates are generally quoted in either direct or indirect quotes. An INDIRECT QUOTE, is the foreign currency price of one unit of home currency . This is probably the one with which you are most familiar. EXAMPLE Yen 116/ US$1 From an American perspective, this is an indirect quote, the price of one dollar (unit of home currency) in foreign currency terms. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>>DIRECT QUOTE A second way to quote currency is called a DIRECT QUOTE. This is the price in home currency terms of one unit of foreign currency . EXAMPLE $0.0086/yen From an American perspective, this is a DIRECT QUOTE, the price of one yen (unit of foreign currency) in home currency terms.
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The quotes used in your textbook are all direct quotes. Since the terms are defined in terms of "home country" prices, what is a direct quote for the United States is an indirect quote from the other nation’s In the example above, what is a direct quote for the United States ($0.0086/yen) is an indirect quote from Japan's viewpoint. Yen160/US$1 is an indirect quote for Americans but a direct quote for the Japanese. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>> RECIPROCAL NOTE: you can go back and forth from one to the other by finding the reciprocal, which is defined as "The number one divided by the number." Here are the quotes from the examples of direct and indirect quotes above. Indirect quote example: Yen 116/ US$1 Direct quote example: $0.0086/yen If we divide the indirect quote by the number 1, we get the direct quote: 1/116 = 0.0086 And if we divide the direct quote by the number 1, we get the indirect quote: 1/.0086 = 116.3* (allow for some rounding differences.) >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>> FOREIGN EXCHANGE TRANSACTIONS
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Session1 - Notes Session 1 > > Overview of Exchange Rates...

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