Chapter 7

# Chapter 7 - another, and profit opportunities exist. 2. Buy...

This preview shows pages 1–11. Sign up to view the full content.

1 THE SPOT MARKET B. Method of Quotation 1.For inter-bank dollar trades: a. American terms example: \$1.21/€ b. European terms example: Peso1.713/\$

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2 THE SPOT MARKET 2. For non-bank customers: Direct quote gives the home currency price (always in the numerator) of one unit of foreign currency. EXAMPLE: \$1.81/£ Since this is a direct quote, we know that in the U.S., one pound transacted at \$1.81
3 THE SPOT MARKET C. Transactions Costs 1. Bid-Ask Spread used to calculate the fee charged by the bank Bid = the price at which the bank is willing to buy Ask = the price it will sell the currency

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
5 THE SPOT MARKET D. Cross Rates 1. The exchange rate between 2 non - US\$ currencies

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
6 THE SPOT MARKET D. Cross Rates (con’t) 2.Calculating Cross Rates (example) Suppose you want to calculate the £/€ cross rate. You know £.5556/US\$ and €.8334/US\$ then £/ € = £.5556/US\$ ÷ €.8334/US\$ = £.6667/ €
7 THE SPOT MARKET E. Currency Arbitrage 1. If cross rates differ from one financial center to

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: another, and profit opportunities exist. 2. Buy cheap in one intl market,sell at a higher price in another 3. The Critical Role of Available Information 8 THE FORWARD MARKET I. INTRODUCTION A. 3 Part Definition of a Forward Contract: an agreement between a bank and a customer to deliver a specified amount of currency against another currency at a specified future date and at a fixed exchange rate 9 THE FORWARD MARKET B. Purpose of a Forward : Hedging the act of reducing exchange rate risk. 10 THE FORWARD MARKET C.Forward Rate Quotations 1. Two Methods: a. Outright Rate: quoted to commercial customers b. Swap Rate: quoted in the inter-bank market as a discount or premium 11 THE FORWARD MARKET CALCULATING THE FORWARD PREMIUM OR DISCOUNT = F-S x 12 x 100 S n where F = the forward rate of exchange S = the spot rate of exchange n = the number of months in the forward contract...
View Full Document

## This note was uploaded on 02/22/2011 for the course BMGT 446 taught by Professor Staff during the Spring '08 term at Maryland.

### Page1 / 11

Chapter 7 - another, and profit opportunities exist. 2. Buy...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online