Chapter 9a Foreign Exchange Market

Chapter 9a Foreign - 9-1Click to edit Master subtitle styleChapter 9The Foreign Exchange Market9-:What is the foreign exchange market?The foreign

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 9-1Click to edit Master subtitle styleChapter 9The Foreign Exchange Market9-2IntroductionQuestion:What is the foreign exchange market?The foreign exchange market is a market for converting the currency of one country into that of another countryQuestion:What is the exchange rate?The exchange rate is the rate at which one currency is converted into another9-3The Functions of the Foreign Exchange MarketQuestion:What is the purpose of the foreign exchange market?The foreign exchange market1.enables the conversion of the currency of one country into the currency of another2.provides some insurance against foreign exchange risk(the adverse consequences of unpredictable changes in exchange rates)9-4Classroom Performance SystemThe rate at which one currency is converted into another is thea)Exchange rateb)Cross ratec)Conversion rated)Foreign exchange market9-5Currency ConversionInternational firms use foreign exchange marketsto convert export receipts, income received from foreign investments, or income received from licensing agreementsto pay a foreign company for products or services to invest spare cash for short terms in money marketsforcurrency speculation (the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates)9-6Currency Conversionhttp://www.xe.com/9-7Insuring Against Foreign Exchange RiskThe 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 protects itself against foreign exchange risk is hedgingThe market performs this function using1.spot exchange rates2.forward exchange rates3.currency swaps 9-8Insuring Against Foreign Exchange Risk1. Spot Exchange RatesThe spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular daySpot rates are determined by the interaction between supply and demand, and so change continually9-9Insuring Against Foreign Exchange Risk2. Forward Exchange Rates Aforward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the futureA forward exchange rate is the exchange rate governing such a future transactionForward rates are typically quoted for 30, 90, or 180 days into the future9-10Insuring Against Foreign Exchange Risk3. Currency SwapsA currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value datesSwaps are used when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange rate risk 9-11Classroom Performance SystemThe rate at which a foreign exchange dealer converts one currency into another currency on a particular day is thea)Currency swap rateb)Forward ratec)Specific rated)Spot rate9-12The Nature of the Foreign Exchange Market...
View Full Document

This note was uploaded on 09/23/2011 for the course ECON 101 taught by Professor Smith during the Spring '11 term at North Shore Community College.

Page1 / 45

Chapter 9a Foreign - 9-1Click to edit Master subtitle styleChapter 9The Foreign Exchange Market9-:What is the foreign exchange market?The foreign

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online