PHYSICS 102 Lecture Notes - Lecture 7: Forward Rate, Real Interest Rate, Savings Account
Document Summary
Exchange foreign currency received for an oversea sale. To have foreign currency for an oversea purchase. Preference for holding part of total wealth in a foreign currency. Central bank (not a retail bank!) is managing the exchange rate: motivation: profit / keeping value of e. g. moderate / manage value) Speculation (buying something, wait until value increases, resell it huge effect; even bigger than trading!) Bigger demand & bigger supply e. g. value increases; yen value decreases higher value, less supply possible (too expensive) Example: (spot) eur / gbp = 1 // promise: 10,000 gbp in 3 months. Spot in 3 months = b) eur / gbp = 0. 1 (amount of gbp 1 will buy me 0. 1 pounds) Or c) eur / gbp = 10: 10,000 , 100,000 best, 1,000 . Shows risk of just using spot market; reducing risk = forward rate (charging higher amounts to cover own risk); Last 2 digits basic points (a cent of a cent)
