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IB9 - Foreign Exchange Market JUAN CARLOS GARCA-PIA style...

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Click to edit Master subtitle style 8/18/11 Foreign Exchange Market JUAN CARLOS GARCÍA-PIÑA ROSETE
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8/18/11 Introduction A firm’s sales, profits, and strategy are affected by events in the foreign exchange market The foreign exchange market is a market for converting the currency of one country into that of another country The exchange rate is the rate at which one currency is converted into another
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8/18/11 The Functions Of The Foreign Exchange The foreign exchange market: is used to convert the currency of one country into the currency of another provide some insurance against foreign exchange risk (the adverse consequences of unpredictable changes in exchange rates)
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8/18/11 Currency Conversion International companies use the foreign exchange market when: the payments they receive for exports, the income they receive from foreign investments, or the income they receive from licensing agreements with foreign firms are in foreign currencies they must pay a foreign company for its products or services in its country’s currency they have spare cash that they wish to invest for short terms in money markets they are involved in currency speculation (the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates)
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8/18/11 Insuring Against Foreign Exchange Risk The foreign exchange market can be used to provide insurance to protect against foreign exchange risk (the possibility that unpredicted changes in future exchange rates will have adverse consequences for the firm) A firm that insures itself against foreign exchange risk is hedging
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8/18/11 Insuring Against Foreign Exchange Risk The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day Spot rates change continually depending on the supply and demand for that currency and other currencies
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8/18/11 Insuring Against Foreign Exchange Risk To insure or hedge against a possible adverse foreign exchange rate movement, firms engage in forward exchanges A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future A forward exchange rate is the rate governing such future transactions Rates for currency exchange are typically quoted for 30, 90, or 180 days into the future
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8/18/11 Insuring Against Foreign Exchange Risk A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates Swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange rate risk
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8/18/11 The Nature Of The Foreign Exchange
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