FOREIGN EXCHANGE INTRODUCTION
Spot market: where currencies are traded for immediate delivery.
Forward market: where contracts are made to buy or sell currencies for future delivery.
Swap transactions: involve a package of a spot and a forward contr
INTERNATIONAL TRADE FINANCE
Main risks involved in international trade
Exchange rate risk (currency denomination of payment)
Risk of non-completion (timely and complete payment)
The risk of default on the part of the importer is present as soon as
INTERNATIONAL ASSET PRICING AND PORTFOLIO MANAGEMENT
The world CAPM
One major theoretical problem with using the world CAPM is that the development of the theory assumes
that investors share the same expectations about real returns on different a
FUTURES AND OPTIONS
A standardised contract for the delivery of a commodity or asset at a price specified today, with delivery and
settlement at some specified date in the future.
Differ from forwards
The terms of the futures contract are
PURCHASING POWER PARITY
The price level: cost of living
The price index: the ratio of a price level at one point in time to the price level in a designated base time.
Absolute PPP states that the exchange rate will adjust to equalize the internal an
INTEREST RATE PARITY
Covered Interest Parity (CIP) states that when foreign exchange risk is covered in the forward foreign
exchange market, for an individual investor the rates of return on domestic and foreign assets (with similar
Risk management and hedging
Three basic financial price risks: exchange rates, interest rates and commodities price.
Hedging is to take positions in financial markets that offset the underlying sources of risks that
arise in a companys normal course
Interest rate swap: the agreement is for one party to swap its fixed interest rate payments for the floating
interest rate payments of another
Reasons: better match cash inflows & outflows and/or to obtain cost savings.
Notional principal: the
Measuring and managing real exchange risk
The profitability of a firm can change because of fluctuations in the real exchange rate is called real
A firm faces a real exchange risk if there are changes in exchange rates that affect a f
TAX MANAGEMENT IN INTERNATIONAL ENVIRONMENT
In many countries, tax payers usually do not voluntarily comply with the tax laws
The MNE must decide whether to follow a practice of full disclosure to tax authorities or adopt the