BUS5 187 Lecture Notes - Lecture 6: Purchasing Power Parity, Arbitrage, Financial Statement
Why is Foreign Exchange Market important?
● The exchange rate is the rate at which one currency is converted into another events in
the foreign exchange market affect firm sales, profits, and strategy.
●is used to convert the currency of one country into the currency of another
●provides some insurance against foreign
●exchange risk - the adverse consequences of
●unpredictable changes in exchange rates
When do firms use Foreign Exchange Market?
●convert the payments they receive for exports, the income they receive from foreign
investments, or the income they receive from licensing agreements with foreign firms are
in foreign currencies
●they must pay a foreign company for its products or services in its country’s currency
●they have spare cash that they wish to invest for short terms in money markets
●they are involved in currency speculation - the short-term movement of funds from one
currency to another in the hopes of profiting from shifts in exchange rates
What is the difference between spot rates and forward rates?
●The spot exchange rate is the rate at which a foreign exchange dealer converts one
currency into another currency on a particular day
○spot rates change continually depending on the supply and demand for that
currency and other currencies
●To insure or hedge against a possible adverse foreign exchange rate movement, firms
engage in forward exchanges
○two parties agree to exchange currency and execute the deal at some specific date
in the future
What is a currency swap?
●A currency swap is the simultaneous purchase and sale of a given amount of foreign
exchange for two different value dates
●Swaps are transacted
●between international businesses and their banks
●between banks
●between governments when it is desirable to move out of one currency into another
for a limited period without incurring foreign exchange rate risk
How are exchange rates determined?
●Exchange rates are determined by the demand and supply for different currencies
●Three factors impact future exchange rate movements
○ A country’s price inflation
○ A country’s interest rate
○ Market psychology
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Document Summary
The exchange rate is the rate at which one currency is converted into another events in the foreign exchange market affect firm sales, profits, and strategy. Is used to convert the currency of one country into the currency of another. Exchange risk - the adverse consequences of. Convert the payments they receive for exports, the income they receive from foreign investments, or the income they receive from licensing agreements with foreign firms are in foreign currencies. They must pay a foreign company for its products or services in its country"s currency. They have spare cash that they wish to invest for short terms in money markets. They are involved in currency speculation - the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates. The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.
