ch03_2 - 3-1Chapter 3Chapter 3Foreign ExchangeForeign...

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Unformatted text preview: 3-1Chapter 3Chapter 3Foreign ExchangeForeign Exchangeand Eurocurrency Marketsand Eurocurrency MarketsLearning objectivesThe Eurocurrency marketThe foreign exchange market Foreign exchange rates and quotations Exposure to currency risk Hedging exposure to currency riskThe empirical behavior of exchange ratesButler / Multinational FinanceChapter 3 Foreign Exchange and Eurocurrency Markets3-2NotationUpper Case Symbols = Priceslower case symbols = changes in a pricePtd=price of an asset in currency d at time tpd=inflation rate in currency d (% change in CPI)id=nominal interest rate in currency dd=real interest rate in currency dStd/f=spot exchange rate at time t between d and fstd/f=change in the spot rate during period tFd/f=forward exchange rate between d and fFinancial marketsThe Eurocurrency marketThe foreign exchange marketThe empirical behavior of exchange ratesNotation Moving value across currencies and over timeCharacteristics of financial marketsButler / Multinational FinanceChapter 3 Foreign Exchange and Eurocurrency Markets3-3Invest in eurosFVt= PV(1+i)tInvest in dollarsFVt$= PV$(1+i$)tMoving $s today into Moving $s today into s tomorrows tomorrowTime 0Time tConvert to euros at Ft$/Convert to euros at S$/VV$VVtFinancial marketsThe Eurocurrency marketThe foreign exchange marketThe empirical behavior of exchange ratesNotationMoving value across currencies and over time Characteristics of financial marketsButler / Multinational FinanceChapter 3 Foreign Exchange and Eurocurrency Markets3-4Savers Borrowers U.S. customers U.S. internal credit marketEurodollars 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 marketEurosterlingEuro-eurosEuroyen Financial marketsThe Eurocurrency marketThe foreign exchange marketThe empirical behavior of exchange ratesNotationMoving value across currencies and over time Characteristics of financial marketsButler / Multinational FinanceChapter 3 Foreign Exchange and Eurocurrency Markets3-5Characteristics of financial marketsLiquidityrefers to the ease with which you can capture an assets valueEfficiency-Operational efficiencyrefers to the influence of transactions costs-Informational efficiencyrefers to whether prices reflect information-Allocational efficiencyrefers to the whether capital moves to productive usesFinancial marketsThe Eurocurrency marketThe foreign exchange marketThe empirical behavior of exchange ratesNotationMoving value across currencies and over timeCharacteristics of financial markets Butler / Multinational FinanceChapter 3 Foreign Exchange and Eurocurrency Markets3-6The Eurocurrency marketEurocurrenciesare bank deposits and loans residing outside any single country-Floating rate pricingusually with maturities less than five years...
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ch03_2 - 3-1Chapter 3Chapter 3Foreign ExchangeForeign...

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