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Chapter 10

International Business – Chapter 10 – The Foreign Exchange Market.pdf

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Department
Management
Course
MGC2120
Professor
Dr Lakmal Abeysekera
Semester
Spring

Description
International  Business  –  Chapter  10  –  The  Foreign  Exchange  Market   Foreign  exchange  market  –  market  for  converting  the  currency  of  one  country  into   that  of  another  country.     Exchange  rate  –  the  rate  at  which  one  currency  is  converted  into  another.     The  functions  of  the  Foreign  Exchange  Market   -­‐ foreign  exchange  risk  –  the  adverse  consequences  of  unpredictable  changes   in  exchange  rates   Currency  Conversion   -­‐ when  a  tourist  changes  one  currency  into  another,  she  is  participating  in  the   foreign  exchange  market.  Tourists  are  minor  participants  in  the  market.   Companies  engaged  in  international  trade  and  investments  are  major  ones.     -­‐ International  businesses  use  foreign  exchange  markets  when  they  must  pay  a   foreign  company  for  its  products  or  services  in  its  country’s  currency.     -­‐ IB  uses  foreign  exchange  markets  when  they  have  spare  cash  that  they  wish   to  invest  for  short  terms  in  money  markets.     -­‐ Currency  speculation  involves  the  short-­‐term  movement  of  funds  from  one   currency  to  another  in  the  hopes  of  profiting  from  shifts  in  exchange  rates.     -­‐ Carry  trade  is  a  kind  of  speculation  that  has  become  more  common  in  recent   years.  It  involves  borrowing  in  one  currency  where  interest  rates  are  low,   use  the  proceeds  to  invest  in  another  currency  where  interest  rates  are  high.     Insuring  against  foreign  exchange  risk   Spot  exchange  rates  –  is  the  rate  at  which  a  foreign  exchange  dealer  converts  one   currency  into  another  currency  on  a  particular  day.  It  is  often  on  a  minute-­‐by-­‐ minute  basis.  Value  of  a  currency  is  determined  by  the  interaction  between  the  D   and  S  of  that  currency  relative  to  S  and  D  of  other  currencies.     Forward  Exchange  rate  –  occurs  when  two  parties  agree  to  exchange  currency  and   execute  the  deal  at  some  specific  date  in  the  future.  It  governs  future  transactions.     Currency  Swaps  –  is  the  simultaneous  purchase  and  sale  of  a  given  amount  of   foreign  exchange  for  two  different  value  dates.  It  is  transacted  between   international  businesses  and  their  banks,  etc.     The  nature  of  the  Foreign  Exchange  Market   -­‐ it  is  not  located  in  one  place.  It  is  a  global  network  of  banks,  brokers,  and   foreign  exchange  dealers  connected  by  electronic  communications  systems.     -­‐ Two  features  of  the  market:  1)  market  never  sleeps  2)  the  integration  of  the   various  trading  centers.  Another  feature  is  the  important  role  played  by  the   U.S  dollar;  and  dollar  is  considered  as  the  vehicle  for  currency.     Economic  Theories  of  Exchange  Rate  Determination   Basically  determined  by  the  D  and  S  of  one  currency  relative  to  the  D  and  S  of   another.     Price  and  Exchange  rates   The  Law  of  one  price  –  in  competitive  markets  free  of  transportation  costs  and   barr
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