Chap009 - Chapter 9 The Foreign Exchange Market Case: The...

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Chapter The Foreign Exchange Market 9
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Case: The Axis hedges the Euro In 1999 Axis Ltd, prices sales to European customers in Euros Euro plunges against the dollar causing lost revenues To hedge against adverse currency movements Axis enters into forward exchange contracts
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The foreign exchange market Foreign exchange market : A market for converting the currency of one country into the currency of another. Exchange rate: The rate at which one currency is converted into another Foreign exchange risk: The risk that arises from changes in exchange rates
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Functions of the foreign exchange market Two functions: Converting currencies Reducing risk
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Currency conversion Companies receiving payment in foreign currencies need to convert these payments to their home currency Companies paying foreign businesses for goods or services Companies investing spare cash for short terms in money market accounts Companies taking advantage of changing exchange rates (Speculation)
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Reducing risk Insuring against foreign exchange risk Spot exchange rate: rate of currency exchange on a particular day Forward exchange rate: two parties agree to exchange currencies on a specific future date Currency swap: simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
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Foreign exchange quotations, June 18,2003
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0 500 1000 1500 1986 1995 1998 2001 $ billions Foreign exchange trade growth
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The foreign exchange market (FX) Global network of banks, brokers and foreign exchange dealers connected by electronic
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Chap009 - Chapter 9 The Foreign Exchange Market Case: The...

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