ch03_2 - Chapter 3 Foreign Exchange and Eurocurrency...

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3-1 Chapter 3 Chapter 3 Foreign Exchange Foreign Exchange and Eurocurrency Markets and Eurocurrency Markets Learning objectives The Eurocurrency market The foreign exchange market Foreign exchange rates and quotations Exposure to currency risk Hedging exposure to currency risk The empirical behavior of exchange rates Butler / Multinational Finance Chapter 3 Foreign Exchange and Eurocurrency Markets
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3-2 Notation Upper Case Symbols = Prices lower case symbols = changes in a price P t d = price of an asset in currency d at time t p d = inflation rate in currency d (% change in CPI) i d = nominal interest rate in currency d é d = real interest rate in currency d S t d/f = spot exchange rate at time t between d and f s t d/f = change in the spot rate during period t F t d/f = forward exchange rate between d and f t d/f Financial markets The Eurocurrency market The foreign exchange market The empirical behavior of exchange rates Notation Moving value across currencies and over time Characteristics of financial markets Butler / Multinational Finance Chapter 3 Foreign Exchange and Eurocurrency Markets
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3-3 Invest in euros FV t = PV 0 (1+i ) t Invest in dollars FV t $ = PV 0 $ (1+i $ ) t Moving $s today into Moving $s today into €s tomorrow €s tomorrow Time 0 Time t Convert to euros at F t $/€ Convert to euros at S 0 $/€ V 0 $ V t Financial markets The Eurocurrency market The foreign exchange market The empirical behavior of exchange rates Notation Moving value across currencies and over time Characteristics of financial markets Butler / Multinational Finance Chapter 3 Foreign Exchange and Eurocurrency Markets
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3-4 Savers Borrowers U.S. customers U.S. internal credit market Eurodollars Eurocurrency (external credit ) markets Japanese customers Savers Borrowers U.K. customers Savers Borrowers Japanese internal credit market U.K. internal credit market Savers Borrowers Euro-zone customers Euro-zone internal credit market Eurosterling Euro-euros Euroyen Financial markets The Eurocurrency market The foreign exchange market The empirical behavior of exchange rates Notation Moving value across currencies and over time Characteristics of financial markets Butler / Multinational Finance Chapter 3 Foreign Exchange and Eurocurrency Markets
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3-5 Characteristics of financial markets Liquidity refers to the ease with which you can capture an asset’s value Efficiency - Operational efficiency refers to the influence of transactions costs - Informational efficiency refers to whether prices reflect information - Allocational efficiency refers to the whether capital moves to productive uses Financial markets The Eurocurrency market The foreign exchange market The empirical behavior of exchange rates Notation Moving value across currencies and over time Characteristics of financial markets Butler / Multinational Finance Chapter 3 Foreign Exchange and Eurocurrency Markets
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3-6 The Eurocurrency market Eurocurrencies
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