▪ The futures rate is the exchange rate at which one can purchase or sell a specified currency on the specified settlement date. ▪ The future spot rate is the spot rate that will exist at a future point in time and is uncertain as of today. 32
Currency Derivatives Interpreting Foreign Exchange Quotations (cont.) ▪ Currency Options Contracts ▪ Currency Call Option : provides the right to buy currency at a specified strike price within a specified period of time. ▪ Currency Put Option : provides the right to sell currency at specified strike price within a specified period of time. 33
International Money Market Corporations or governments need short-term funds denominated in a currency different from their home currency. The international money market has grown because firms: ▪ May need to borrow funds to pay for imports denominated in a foreign currency. ▪ May choose to borrow in a currency in which the interest rate is lower . ▪ May choose to borrow in a currency that is expected to depreciate against their home currency 34
International Money Market Origins and Development ▪ European Money Market: Dollar deposits in banks in Europe and other continents are called Eurodollars or Eurocurrency. Origins of the European money market can be traced to the Eurocurrency market that developed during the 1960s and 1970s. ▪ Asian Money Market: Centered in Hong Kong and Singapore. Originated as a market involving mostly dollar-denominated deposits, and was originally known as the Asian dollar market. 35
International Money Market Money Market Interest Rates Among Currencies ▪ The money market interest rates in any particular country are dependent on the demand for short-term funds by borrowers, relative to the supply of available short-term funds that are provided by savers. (Exhibit 3.4) ▪ Money market rates vary due to differences in the interaction of the total supply of short-term funds available (bank deposits) in a specific country versus the total demand for short-term funds by borrowers in that country. 36
Exhibit 3.4 Comparison of 2011 International Money Market Interest Rates 37
International Money Market Money Market Interest Rates Among Currencies (cont.) ▪ Global Integration of Money Market Interest Rates ▪ Money market interest rates among countries tend to be highly correlated over time. ▪ When economic conditions weaken , the corporate need for liquidity declines, and corporations reduce the amount of short term funds they wish to borrow. ▪ When economic conditions strengthen , there is an increase in corporate expansion, and corporations need additional liquidity to support their expansion. 38
Risk of International Money Market Securities Money Market Interest Rates Among Currencies (cont.) ▪ Risk of International Money Market Securities ▪ International Money Market Securities are debt securities issued by MNCs and government agencies with a short-term maturity (1 year or less) ▪ Normally, these securities are perceived to be very safe from the risk of default.
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