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Chapter 9

ADM 3318 - Chapter 9 Notes - The Foreign Exchange Market.docx

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University of Ottawa

ADM 3318International BusinessDecember 6 2012Chapter 9 The Foreign Exchange MarketIntroduction A market for converting the currency of one country into thatForeign Exchange Market of another countryExchange Rate The rate at which one currency is converted into anotherThe Functions of the Foreign Exchange MarketForeign Exchange Risk The risk that changes in exchange rates will hurt the profitability of a business dealCurrency Conversion Four main uses of foreign exchange markets1The payments a company receives for its exports income it receives from foreign investments etc may be in foreign currencies2When a company pays a foreign company for its products or services in its countrys currency3International businesses use foreign exchange markets when they have spare cash that they wish to invest for short terms in money markets4Currency Speculation Moving funds from one currency to another over the shortterm in hopes of profiting from shifts in exchange ratesInsuring against Foreign Exchange RiskHedging The process of insuring ones business against foreign exchange risk by using forward exchanges or currency swapsSpot Exchange Rates The rate at which a foreign exchange dealer converts currency on an
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