Foreign Exchange Market: Chapter 7. Chapter Objectives & Lecture Notes FINA 5500

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Foreign Exchange Market: Chapter 7. Chapter Objectives & Lecture Notes FINA 5500"

Transcription

1 Foreign Exchange Market: Chapter 7 Chapter Objectives & Lecture Notes FINA 5500

2 Chapter Objectives: FINA 5500 Chapter 7 / FX Markets 1. To be able to interpret direct and indirect quotes in the spot market for foreign currencies published in the financial press 2. To be able to use direct and indirect quotes in the spot market to convert a given amount of one currency into another currency 3. To be able to estimate the percentage appreciation and depreciation of foreign currencies based on direct and indirect quotes in the spot market 4. To be able to estimate the percentage appreciation and depreciation of the US dollar (from the foreign country s view point) based on direct and indirect quotes 5. To be able to compute a currency s bid-ask spread, based on its bid and ask quotes in the spot market 6. To be able to calculate the dollar cost of making a round trip transaction based on its bid and ask quotes in the spot market 7. To be able to identify and exploit a locational arbitrage opportunity in the FX market 8. To be able to estimate the cross-exchange rates (and bid-ask quotes) between two currencies based their respective direct and indirect (and bid-ask) quotes in the spot market 9. To be able to identify and exploit a triangular arbitrage opportunity in the FX market 10. To be able to explain in your own words, the rational for the forward market for foreign currencies 11. To be able to interpret direct and indirect quotes in the forward market for foreign currencies published in the financial press 12. Based on direct and indirect quotes in the forward market for foreign currencies, you should be able to calculate the dollar values of the long and short positions taken in the forward market, as well as profit or loss from taking these positions 13. To be able to compare and contrast the role of a hedger and a speculator in the forward market for foreign currencies 14. To be able to estimate the annualized forward premium or discount

3 OVERVIEW: CHAPTER 7 Spot Market for Foreign Exchange» Market characteristics» Interpreting quotes» Cross exchange rates Forward Market for Foreign Exchange» Why is it used» Market characteristics» Estimating forward premium and discount 1 Spot Market Transactions at the same point in time. The market is a network Large money center banks are wholesalers Major currencies: US $; Yen ; Euros; Swiss Francs; Australian $; Canadian $ Spot Rate : The price at which a foreign currency can be bought/sold, today. Each spot exchange rate can be expressed in two ways:» Direct quote: price of the foreign currency expressed in units of the home currency (example: 1BP = USD 2.00)» Indirect quote: price of one unit of the home currency expressed in units of the foreign currency (example: 1USD = BP 0.50) 2 1

4 FX Price Quote Source: 3 Spot Foreign Exchange Quotes Direct Quote: U.S. dollar equivalent» Online Quotes 1 BP = $ SF = $0.8393» Direct quote = 1 / Indirect quote 1 BP = 1 / = $ SF = 1 / = $ Indirect Quote: Currency per USD» Online Quotes 1 USD = BP USD = SF1.1914» Indirect quote = 1 / Direct quote 1 USD = 1 / = BP USD = 1 / = SF

5 Applying Direct and Indirect Quotes to Convert Currency Currency Conversion Formulas: Converting USD into FC Converting FC into USD Using DQ USD / DQ = FC FC * DQ = USD Using IQ USD * IQ = FC FC / IQ = USD DQ = Direct quote IQ = Indirect quote USD = US Dollars FC = Foreign currency 5 Bid and Ask Quotes and Spread Ask Quote (currency dealer s selling price)» $ / 1 British Pound. Bid Quote (currency dealer s buying price)» $ / 1 British Pound. Ask price > Bid price Bid-Ask Quotes: $ or just Bid-Ask Spread (in %) = 100 * (Ask - Bid) / Ask» 100 * ( $ ) / = % 6 3

6 Indirect Price Quotes (Foreign Currency / USD) Symbol Currency Close Bid Ask USDJPY Yen USDEUR Euro USDGBP British Pound USDMXN Mexican Peso USDCHF Swiss Franc Long-term FX Rates: USD & Yen (Indirect Quote) 8 4

7 Long-term FX Rates: USD & Euro (Direct Quote) 9 Long-term FX Rates: USD with Major Currencies Source:

8 Percentage Change: Direct Quotes Formula: % change in DQ = 100*(DQ1 DQ0) / DQ0 DQ0 = Direct quote, at the beginning of the period DQ1 = Direct quote, at the end of the period Interpretation: Measures appreciation or depreciation of the foreign currency, in terms of the USD. As seen from the US viewpoint Example: On 1/1/X1 the DQ for SF was $0.50, on 1/1/X2 it was $0.60, and on 1/1/X3 it was $0.57 Period Percentage Change in DQ Interpretation 20X1-20X2 100*( ) / 0.50 = 20.00% SF appreciated by 20% 20X2-20X3 100*( ) / 0.60 = % SF depreciated by 5% 11 Percentage Change: Indirect Quotes Formula: % change in IQ = 100*(IQ1 IQ0) / IQ0 IQ0 = Indirect quote, at the beginning g of the period IQ1 = indirect quote, at the end of the period Interpretation: Measures appreciation or depreciation of the USD, in terms of the foreign currency. As seen from the foreign country s viewpoint Example: On 1/1/X1 the IQ for MP was 10.00, on 1/1/X2 it was 9.00, and on 1/1/X3 it was Period Percentage Change in IQ Interpretation 20X1-20X2 100*( ) / 10.00= % USD depreciated by 10% 20X2-20X3 100*( ) / 9.00= 25.00% USD appreciated by 25% 12 6

9 Percentage Change in Direct Quotes: Using Indirect Quotes % change in DQ = 100*[100 / (100 + % change in IQ) - 1] Example: Suppose, on 1/1/X1 the IQ for JY was 120, and on 1/1/X2 it was 100. It means that during this period, USD depreciated by 20% from the Japanese viewpoint. What was the % change in the value of JY from the US viewpoint? Solution: During the 20X1-X2, IQ for JY changed by 20% Percentage in DQ (over the same period): 100* [100 / (100 20) 1] = 100* [(100/80) 1] = + 25% During this period, JY appreciated by 25% (from US view point) 13 Percentage Change in Indirect Quotes: Using Direct Quotes % change in IQ = 100*[100 / (100 + % change in DQ) - 1] Example: Suppose, on 1/1/X1 the DQ for SF was $0.50, and on 1/1/X2 it was $0.55. It means that during this period, SF appreciated by 10% from the US viewpoint. What was the % change in the value of USD from the Swiss viewpoint? Solution: During 20X1-X2, DQ for SF changed by + 10% Percentage in IQ (over the same period): 100* [100 / ( ) 1] = 100* [(100/110) 1] = % During this period, USD depreciated by 9.09% from the Swiss viewpoint 14 7

10 Cross Exchange Rates Quotes Deriving the exchange rates between two currencies from their respective direct quotes» Example: Use the direct dollar quotes for SF and BP to calculate: how many SF per BP how many BP per SF» Direct dollar quotes: (SF= $ , BP = $ )» Cross exchange rates: The price of BP in terms of SF = (DQ of BP / DQ of SF) ( / ) = SF / BP One BP = SF The price of SF in terms of BP = (DQ of SF / DQ of BP) ( / ) = BP / SF One SF = BP Cross Exchange Rates Quotes:With Bid and Ask Quotes Direct dollar quotes:» For Swiss Francs: Bid price: $ Ask price: $ Quote: $ » For Hong Kong Dollar: Bid price = $ Ask Price = $ Quote: $ Cross exchange rates: Find the direct bid-ask quote for Swiss Francs in Hong Kong, stated in HK $ 16 8

11 LOCATIONAL ARBITRAGE Buy low in one location & sell high in another location» In the FX market The buying price (ask price) in one bank is lower than the selling price (bid price) of another bank Market adjustments which will eliminate locational arbitrage» In the FX market: The ask price will rise and bid price will fall Till ask price (of one bank) is greater than or equal to bid price (of another bank) 17 LOCATIONAL ARBITRAGE PROFIT Case 1: Arbitrage Possible New York Bank Quotes» Ask $1.84 / 1 BP» Bid $1.81 / 1 BP London Bank Quotes» Ask $1.89 / 1 BP» Bid $1.86 / 1 BP Case 2: No Arbitrage Possible Chicago Bank Quotes» Ask $0.64 / 1 SF» Bid $0.60 / 1 SF Berlin Bank Quotes» Ask $0.66 / 1 SF» Bid $0.62 / 1 SF 18 9

12 Triangular Arbitrage: When Implied & Actual Cross Rates are Different 1 BP = $ SF = $0.50 Implied cross rate: 1 BP = 1.5/0.5 = 3.0 SF If actual cross rate: 1 BP = 3.50 SF (It is better to sell BP in return for SF) If actual cross rate: 1 BP = 2.50 SF (It is better to buy BP with SF) $ $ BP SF BP SF 19 Triangular Arbitrage: When Implied Cross Rate is Less than Actual Cross Rate 1 BP = $ SF = $0.50 Implied cross rate: 1 BP = 1.5/0.5 = 3.0 SF If actual cross rate: 1 BP = 3.50 SF. Have $1,000 $ 1,000 $1, BP SF 2, X

13 Triangular Arbitrage: When Implied Cross Rate is Less than Actual Cross Rate $ exchanged for BP» The price of BP rises against the $: ($1.50 /BP ) BP exchanged for SF» The price of BP falls against SF: (SF 3.50/BP ) SF exchanged for $» The price of SF falls against the $: ($ 0.50/SF ) The implied cross rate approaches the actual cross rate 21 Triangular Arbitrage: When Implied Cross Rate is Greater than Actual Cross Rate 1 BP = $ SF = $0.50 Implied cross rate: 1 BP = 1.5/0.5 = 3.0 SF If actual cross rate: 1 BP = 2.50 SF. Have $1,000 $ 1,200 $1,000 BP 800 SF 2,000 2,000 /

14 Triangular Arbitrage: When Implied Cross Rate is Greater than Actual Cross Rate $ exchanged for SF» The price of DM rises against the $: ($0.50 /SF ) SF exchanged for BP» The price of BP rises against SF: (SF 2.50/BP ) BP exchanged for $» The price of BP falls against the $: ($ 1.50/BP ) The implied cross rate approaches the actual cross rate 23 Forward Currency Market Market where Forward Contracts by traded Forward Contracts are agreements to deliver (or take delivery of) a specified amount of foreign currency at a fixed future date and at a fixed exchange rate. Used by businesses and currency traders to:» Hedge against currency (exchange rate) risk» Speculate (make trading profits) 24 12

15 Forward Exchange Rate The dollar price at which a foreign currency can be bought and sold at future date. This rate is set at the time when the contract is signed. No money is exchanged at this time. 25 Forward Rate Quotes Direct Dollar Quotes from WSJ (attached):» Swiss Franc (FF) spot rate (direct quote): $ months forward rate (direct quote): $0.8492» Japanese Yen (JY) spot rate (direct quote): $ months forward rate (direct quote): $

16 Using Forward Contracts Two major applications of forward contracts:» Hedging» Speculation 27 Using Forward Contracts for Hedging: Theory Buy Forward Contracts (take a Long Position in the FM):» When you expect to make a payment in Foreign currency, at a future date: You gain when the spot rate at the future date is higher than the forward exchange rate You lose when the spot rate at the future date is lower than the forward exchange rate Sell Forward Contracts (take a Short Position in the FM):» When you expect to receive a payment in Foreign currency, at a future date: You gain when the spot rate at the future date is lower than the forward exchange rate You lose when the spot rate at the future date is higher than the forward exchange rate 28 14

17 Using Forward Contracts for Hedging: Examples Toyota of Richardson, plans to buy 10 Lexus to be delivered in 3 months. A Payment of JY 30 million needs to be made to Toyota in 6 months Buy 6-month forward contract for 30 million JY How many $ will Toyota of Richardson need 6 months later? Aetna receives a bi-annual insurance premium of 1 million SF from a Swiss customer. The next receipt is due in six months» Sell 6-month forward contract for 1 million SF How many $ will Aetna receive 6 months later? 29 Using Forward Contracts for Speculation: Theory Buy Forward Contracts (take a Long Position in the FM):» When you expect the future spot rate to be higher then the current forward rate: You will gain when the future spot rate is higher than the current forward exchange rate You will lose when the future spot rate is lower than the current forward exchange rate Sell Forward Contracts (take a Short Position in the FM):» When you expect the future spot rate to be lower then the current forward rate: You will gain when the future spot rate is lower than the current forward exchange rate You will lose when the future spot rate is higher than the current forward exchange rate 30 15

18 Using Forward Contracts for Speculation: Examples Today, the 6-month forward rate on SF is $0.8492» If you expect that 6-months from today, the spot rate of SF will be greater than $0.8492: The you should BUY SF forward contracts If 6-months latter, the SR for SF is $0.8495:» you make ( ) = $ / SF (profit) If 6-months latter, the SR for SF is $ :» you make ( ) = - $ / SF (loss)» If you expect that t 6-months from today, the spot rate of SF will be less than $0.8492: Then you should SELL SF forward contracts If 6-months latter, the SR for SF is $0.8495:» you make ( ) = - $ / SF (loss) If 6-months latter, the SR for SF is $0.8485:» you make ( ) = $ / SF (profit) 31 Forward Premium (or Discount) Annualized % premium (discount)» [(Forward - Spot) / Spot ] * [ 360/ Days to Maturity] * day forward premium for Swiss Franc:» [($ $0.8401) / $ ] * [ 360/180] * 100 = 2.17 % 180 day forward premium for Japanese Yen:» [($ $ ) / $ ] * [ 360/180] * 100 = 2.94 % 32 16

19 Currency Conversion Problem Set #1 Please use the following quotes, to answer the questions listed below: Currency Quotes Direct or Indirect? Swiss francs 1 SF for $0.50 Mexican pesos 10 MP for 1 USD British pounds 0.75 BP for 1 USD 1. $3,000,000 can be converted into British pounds 2. SF 1,500,000 can be converted into USD 3. MP 600,000 can be converted into Swiss francs 4a. How many SF does it take to buy 1 BP? 4b. How many BP does it take to buy 1 SF?

20 Currency Conversion Problem Set #2 1/1/X0 1/1/X1 BP quotes $2.00 per BP $2.18 per BP SF quotes SF 2.50 per USD SF 2.00 per USD JY quotes JY100 per USD JY 120 per USD For the time period: 1/1/X0-1/1/X1, please calculate: 1. The percentage appreciation / depreciation of BP in terms of the USD 2. The percentage appreciation / depreciation of USD in terms of SF 3. The percentage appreciation / depreciation of JY from the US viewpoint 4. Suppose during this time period the indirect quote for MP decreased by 15%. (i) By what % did the MP appreciate/depreciate from the US viewpoint? (ii) By what % did the USD appreciate/depreciate from the Mexican viewpoint?

21 Currency Conversion Problem Set #3 Currency Quotes on 1/1/X1 Quote on 1/1/X2 Canadian dollars 1 CD = $ CD = $0.54 Swiss francs SF 1.80 = 1 USD SF 1.90 = 1 USD Japanese yen 1 USD = JY USD = JY 120 a. Based on the 1/1/X2 quote, convert 8,000,000 Canadian dollars into US dollars: b. Based on the 1/1/X2 quotes, convert $25,000,000 into Swiss francs: c. During the one-year period, what was the percentage appreciation / depreciation of the Japanese yen from the US point of view? d. During the one-year period, what was the percentage appreciation / depreciation of the US dollar from the Swiss point of view?

22 Bid-Ask Spread Problem Set #1 The following table presents bid and ask quotes for BP from currency dealers in New York and London: Currency Dealer in New York London Bid Quote for BP $ $ 1.65 Ask Quote for BP $ $ Assume that you dealt with the New York currency dealer only. You converted $100,000 into pounds, and immediately afterwards sold the pounds for dollars. Estimate the dollar amount you lost in this round trip transaction. 2. Assume that you dealt with the London currency dealer only. What is the percentage bid-ask spread for this dealer? 3. Which dealer (s) would you buy from, and sell to?

23 Cross Exchange Rates Quotes With Bid and Ask Quotes: In-Class Exercise Direct dollar quotes: For Swiss Francs: Bid-Ask Quote: $ For Canadian Dollar: Bid-Ask Quote: $ Cross exchange rates: Find the direct bid-ask quote for Canadian dollars, stated in Swiss Francs 1

24 EXAMPLE: FX FORWARD MARKET BASICS Today: 1/1/XX Six Months Latter: 6/1/XX Spot Rate for BP = $ Month Forward Rate for BP = $1.60 FC BUYER / LONG POSITION HOLDER: 6-Month Forward Contract for BP 1,000,000 Current Financial Obligations: None FC SELLER / SHORT POSITION HOLDER: 6-Month Forward Contract for BP 1,000,000 Current Financial Obligations: None Financial Obligations of Forward Contract Buyer: Pay: 1.60 x 1,000,000 = $1,600,000 Receive: BP 1,000,000 Suppose on 6/1/XX SR = $1.63 SR = $1.58 Then for BP 1,000,000 You have paid: $1,600,000 And it is worth: $1,630,000 Your profit/loss: $ 30,000 Then for BP 1,000,000 You have paid: $1,600,000 And it is worth: $1,580,000 Your profit/loss: - $ 20,000 Financial Obligations of Forward Contract Seller: Pay: BP 1,000,000 Receive: 1.60 x 1,000,000 = $1,600,000 Suppose on 6/1/XX SR = $1.63 SR = $1.58 Then for BP 1,000,000 You have received: $1,600,000 And it is worth: $1,630,000 Your profit/loss: - $ 30,000 Then for BP 1,000,000 You have received: $1,600,000 And it is worth: $1,580,000 Your profit/loss: $ 20,000

25 EXERCISE: FX FORWARD MARKET BASICS Today: 1/1/XX Six Months Latter: 6/1/XX Spot Rate for Euro = $ Month Forward Rate for E = $1.20 FC BUYER / LONG POSITION HOLDER: 6-Month Forward Contract for E 5,000,000 Current Financial Obligations: Pay: Receive: Financial Obligations of Forward Contract Buyer: Suppose on 6/1/XX E = $1.13 E = $1.25 Then for E 5,000,000 Then for E 5,000,000 You have paid: $ You have paid: $ And it is worth: $ And it is worth: $ Your profit/loss: $ Your profit/loss: $ FC SELLER / SHORT POSITION HOLDER: 6-Month Forward Contract for E 5,000,000 Current Financial Obligations: Pay: Receive: Financial Obligations of Forward Contract Seller: Suppose on 6/1/XX E = $1.13 E = $1.25 Then for E 5,000,000 Then for E 5,000,000 You have received: $ You have received: $ And it is worth: $ And it is worth: $ Your profit/loss: $ Your profit/loss: $

26 FX Spot / Forward Market Transactions Problem Set #1 Forward and Spot Prices Quotes for Foreign Currencies: From Wall Street Journal Today: 01/15/XX (Wednesday) 1-month latter: 02/15/XX (Tuesday) 6-months latter: 07/15/XX (Monday) 1. Today (1/15/XX), you bought 100 million JY in the spot market from Credit Suisse First Boston (CSFB), and sold it back to CSFB one month latter: Your cash flows today, are: Your cash flows on 2/15/XX are: Your profit/loss is: CSFB s cash flows today, are: CSFB s cash flows on 2/15/XX are: CSFB s profit/loss: 2. Today (1/15/XX), you bought a one-month forward contract for 100 million JY from Credit Suisse First Boston (CSFB) : Your cash flows today, are: Your cash flows on 2/15/XX are: Your profit/loss (in the FM) is: CSFB s cash flows today, are: CSFB s cash flows on 2/15/XX are: CSFB s profit/loss (in the FM) is:

27 FX Spot / Forward Market Transactions Problem Set #1 (Contd.) 3. Today (1/15/XX), you sold a six-month forward contract for 100 million JY to Credit Suisse First Boston (CSFB) : Your cash flows today, are: Your cash flows on 7/15/XX are: Your profit/loss (in the FM) is: CSFB s cash flows today, are: CSFB s cash flows on 7/15/XX are: CSFB s profit/loss (in the FM) is: 4. Today (1/15/XX), you bought a one-month forward contract for 1 million BP from Credit Suisse First Boston (CSFB) : Your cash flows today, are: Your cash flows on 2/15/XX are: Your profit/loss (in the FM) is: CSFB s cash flows today, are: CSFB s cash flows on 2/15/XX are: CSFB s profit/loss (in the FM) is: 5. Today (1/15/XX), you sold a six-month forward contract for 10 million SF to Credit Suisse First Boston (CSFB) : Your cash flow today, is: Your cash flows on 7/15/XX is: Your profit/loss (in the FM) is: CSFB s cash flow today, is: CSFB s cash flows on 7/15/XX is: CSFB s profit/loss (in the FM) is:

28

29 Formula: Currency Conversion Quotes: DQ (direct quote): The dollar price of one unit of foreign currency (FC) IQ (indirect quote): Number of units of FC per one dollar; DQ = 1 / IQ and IQ = 1 / DQ DQ 0 = DQ now; DQ 1 = DQ 1-year later; IQ 0 = IQ now; IQ 1 = IQ 1-year later Calculating Percentage Change in DQ and IQ: % change in DQ = 100 * (DQ 1 -DQ 0 ) / DQ 0 = 100*[100 / (100 + % change in IQ) - 1] % change in IQ = 100 * (IQ 1 -IQ 0 ) / IQ 0 = 100*[100 / (100 + % change in DQ) - 1 Currency Conversion: Converting USD into FC Converting FC into USD Using DQ Using IQ USD / DQ = FC USD * IQ = FC FC * DQ = USD FC / IQ = USD Ask Price (A): The buying price for one unit of FC from the currency dealer; Bid Price (B): The selling price for one unit of FC to the currency dealer; Bid-Ask Spread = 100* (A B) / A Cross-Quotes: DQ1= $ price of FC1; DQ2 = $ price of FC2; The price of FC1 in terms of FC2 (how many unit of FC2 does it take to buy one FC1) = DQ1 / DQ2 The price of FC2 in terms of FC1 (how many unit of FC1 does it take to buy one FC2) = DQ2 / DQ1 Forward Premium or Discount: [(forward rate spot rate) / spot rate] * [360/days to maturity] * 100

The Market for Foreign Exchange

The Market for Foreign Exchange The Market for Foreign Exchange Chapter Objective: 5 Chapter Five This chapter introduces the institutional framework within which exchange rates are determined. It lays the foundation for much of the

More information

Foreign Exchange Market INTERNATIONAL FINANCE. Function and Structure of FX Market. Market Characteristics. Market Attributes. Trading in Markets

Foreign Exchange Market INTERNATIONAL FINANCE. Function and Structure of FX Market. Market Characteristics. Market Attributes. Trading in Markets Foreign Exchange Market INTERNATIONAL FINANCE Chapter 5 Encompasses: Conversion of purchasing power across currencies Bank deposits of foreign currency Credit denominated in foreign currency Foreign trade

More information

CHAPTER 7 SUGGESTED ANSWERS TO CHAPTER 7 QUESTIONS

CHAPTER 7 SUGGESTED ANSWERS TO CHAPTER 7 QUESTIONS INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 7 SUGGESTED ANSWERS TO CHAPTER 7 QUESTIONS 1. Answer the following questions based on data in Exhibit 7.5. a. How many Swiss francs

More information

INTRODUCTION TO FOREIGN EXCHANGE

INTRODUCTION TO FOREIGN EXCHANGE INTRODUCTION TO FOREIGN EXCHANGE Capademy Tutorial Series Option Banque Training Series Vol. 1 The foreign exchange market known as forex for short is the market in which currencies or sovereign money

More information

Solutions: Sample Exam 2: FINA 5500

Solutions: Sample Exam 2: FINA 5500 Short Questions / Problems Section: (88 points) Solutions: Sample Exam 2: INA 5500 Q1. (8 points) The following are direct quotes from the spot and forward markets for pounds, yens and francs, for two

More information

The Foreign Exchange Market. Role of Foreign Exchange Markets

The Foreign Exchange Market. Role of Foreign Exchange Markets The Foreign Exchange Market Role of the foreign exchange markets Foreign exchange (FX) basics» Terminology» Types of contracts Organization and institutional features» Actors - brokers, dealers» Segments

More information

Assignment 10 (Chapter 11)

Assignment 10 (Chapter 11) Assignment 10 (Chapter 11) 1. Which of the following tends to cause the U.S. dollar to appreciate in value? a) An increase in U.S. prices above foreign prices b) Rapid economic growth in foreign countries

More information

Ch. 6 The Foreign Exchange Market. Foreign Exchange Markets. Functions of the FOREX Market

Ch. 6 The Foreign Exchange Market. Foreign Exchange Markets. Functions of the FOREX Market Ch. 6 The Foreign Exchange Market Topics FOREX (or FX) Markets FOREX Transactions FOREX Market Participants FOREX Rates & Quotations Cross Rates and Arbitrage Foreign Exchange Markets The FOREX market

More information

Chapter 1 Currency Exchange Rates

Chapter 1 Currency Exchange Rates Chapter 1 Currency Exchange Rates 1. Since the value of the British pound in U.S. dollars has gone down, it has depreciated with respect to the U.S. dollar. Therefore, the British will have to spend more

More information

CHAPTER 5 THE MARKET FOR FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

CHAPTER 5 THE MARKET FOR FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS CHAPTER 5 THE MARKET FOR FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Give a full definition of the market for foreign exchange. Answer: Broadly

More information

Chapter 5. The Foreign Exchange Market. Foreign Exchange Markets: Learning Objectives. Foreign Exchange Markets. Foreign Exchange Markets

Chapter 5. The Foreign Exchange Market. Foreign Exchange Markets: Learning Objectives. Foreign Exchange Markets. Foreign Exchange Markets Chapter 5 The Foreign Exchange Market Foreign Exchange Markets: Learning Objectives Examine the functions performed by the foreign exchange (FOREX) market, its participants, size, geographic and currency

More information

Foreign Exchange markets and international monetary arrangements

Foreign Exchange markets and international monetary arrangements Foreign Exchange markets and international monetary arrangements Ruichang LU ( 卢 瑞 昌 ) Department of Finance Guanghua School of Management Peking University Some issues on the course arrangement Professor

More information

QUESTIONS CHAPTER 20 FOREIGN EXCHANGE MARKETS

QUESTIONS CHAPTER 20 FOREIGN EXCHANGE MARKETS QUESTIONS CHAPTER 20 FOREIGN EXCHANGE MARKETS Question 20.1 Suppose you want to buy a car. You either want to buy a Chevrolet for US$ 23,000, a Volkswagen for 15,900, a Honda for 2.2 million or a Hyundai

More information

Test 4 Created: 3:05:28 PM CDT 1. The buyer of a call option has the choice to exercise, but the writer of the call option has: A.

Test 4 Created: 3:05:28 PM CDT 1. The buyer of a call option has the choice to exercise, but the writer of the call option has: A. Test 4 Created: 3:05:28 PM CDT 1. The buyer of a call option has the choice to exercise, but the writer of the call option has: A. The choice to offset with a put option B. The obligation to deliver the

More information

CHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE

CHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE CHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE CHAPTER OVERVIEW This chapter discusses the nature and operation of the foreign exchange market. The chapter begins by describing the foreign exchange market and

More information

Chapter 1.2. Currencies Come in Pairs

Chapter 1.2. Currencies Come in Pairs Chapter 1.2 Currencies Come in Pairs 0 GETTING STARTED You know the advantages of trading forex, and you are excited to start trading. Now you need to learn what this market is all about. How does it work?

More information

This act of setting a price today for a transaction in the future, hedging. hedge currency exposure, short long long hedge short hedge Hedgers

This act of setting a price today for a transaction in the future, hedging. hedge currency exposure, short long long hedge short hedge Hedgers Section 7.3 and Section 4.5 Oct. 7, 2002 William Pugh 7.3 Example of a forward contract: In May, a crude oil producer gets together with a refiner to agree on a price for crude oil. This price is for crude

More information

INTRODUCTION. This program should serve as just one element of your due diligence.

INTRODUCTION. This program should serve as just one element of your due diligence. FOREX ONLINE LEARNING PROGRAM INTRODUCTION Welcome to our Forex Online Learning Program. We ve always believed that one of the best ways to protect investors is to provide them with the materials they

More information

Learn to Trade FOREX II

Learn to Trade FOREX II Lesson 1 The Forex Market The Foreign Exchange market, also referred to as the "FX market" or "Spot FX", is the largest financial market in the world with daily average turnover of US$1.9 trillion. Unlike

More information

Arbitrage. In London: USD/GBP 0.645 In New York: USD/GBP 0.625.

Arbitrage. In London: USD/GBP 0.645 In New York: USD/GBP 0.625. Arbitrage 1. Exchange rate arbitrage Exchange rate arbitrage is the practice of taking advantage of inconsistent exchange rates in different markets by selling in one market and simultaneously buying in

More information

CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS

CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS. On April, the spot price of the British pound was $.86 and the price of the June futures

More information

Chapter Review and Self-Test Problems

Chapter Review and Self-Test Problems CHAPTER 22 International Corporate Finance 771 3. The fundamental relationships between international financial variables: a. Absolute and relative purchasing power parity, PPP b. Interest rate parity,

More information

2 Stock Price. Figure S1.1 Profit from long position in Problem 1.13

2 Stock Price. Figure S1.1 Profit from long position in Problem 1.13 Problem 1.11. A cattle farmer expects to have 12, pounds of live cattle to sell in three months. The livecattle futures contract on the Chicago Mercantile Exchange is for the delivery of 4, pounds of cattle.

More information

Chapter 4 - The Foreign Exchange Market. Functions of the FX Market

Chapter 4 - The Foreign Exchange Market. Functions of the FX Market Chapter 4 - The Foreign Exchange Market Market Structure and Roles Volume and distribution by Country, Currencies Who trades with Whom Introduction to different kinds of Foreign Exchange contracts Spot,

More information

Assignment 3 Answer Key (Maximum Points: 100) Multiple-Choice Questions Each question is worth 3 points. Explanation is not required.

Assignment 3 Answer Key (Maximum Points: 100) Multiple-Choice Questions Each question is worth 3 points. Explanation is not required. Econ 4401 International Economics University of Minnesota Deniz Cicek Fall 2009 Assignment 3 Answer Key (Maximum Points: 100) Multiple-Choice Questions Each question is worth 3 points. Explanation is not

More information

The foreign exchange market is global, and it is conducted over-the-counter (OTC)

The foreign exchange market is global, and it is conducted over-the-counter (OTC) FOREIGN EXCHANGE BASICS TERMS USED IN FOREX TRADING: The foreign exchange market is global, and it is conducted over-the-counter (OTC) through the use of electronic trading platforms, or by telephone through

More information

Chapter 1.2. Currencies Come in Pairs

Chapter 1.2. Currencies Come in Pairs Chapter 1.2 Currencies Come in Pairs 0 GETTING STARTED You know the advantages of trading forex, and you are excited to start trading. Now you need to learn what this market is all about. How does it work?

More information

An introduction to the foreign exchange market Moorad Choudhry September 2002

An introduction to the foreign exchange market Moorad Choudhry September 2002 An introduction to the foreign exchange market Moorad Choudhry September 2002 The market in foreign exchange is an excellent example of a liquid, transparent and immediate global financial market. Rates

More information

The purpose of this ebook is to introduce newcomers to the forex marketplace and CMTRADING. Remember that trading in forex is inherently risky, and

The purpose of this ebook is to introduce newcomers to the forex marketplace and CMTRADING. Remember that trading in forex is inherently risky, and The purpose of this ebook is to introduce newcomers to the forex marketplace and CMTRADING. Remember that trading in forex is inherently risky, and you can lose money as well as make money. Manage your

More information

Introduction to Forex Trading

Introduction to Forex Trading Introduction to Forex Trading The Leader in Rule-Based Trading 1 Important Information and Disclaimer: TradeStation Securities, Inc. seeks to serve institutional and active traders. Please be advised that

More information

SPOT FX Trading Strategies. Copyright Powerup Capital Sdn Bhd

SPOT FX Trading Strategies. Copyright Powerup Capital Sdn Bhd SPOT FX Trading Strategies Currency Codes USD = US Dollar EUR = Euro JPY = Japanese Yen GBP = Great Britian Pound CHF = Swiss Franc CAD = Canadian Dollar AUD = Australian Dollar NZD = New Zealand Dollar

More information

International Finance Prof. A. K. Misra Department of Management Indian Institute of Technology, Kharagpur

International Finance Prof. A. K. Misra Department of Management Indian Institute of Technology, Kharagpur International Finance Prof. A. K. Misra Department of Management Indian Institute of Technology, Kharagpur Lecture - 7 Features of Foreign Exchange Market Good morning, today we will discuss features of

More information

CHAPTER 3. FORWARD FOREIGN EXCHANGE

CHAPTER 3. FORWARD FOREIGN EXCHANGE CHAPTER 3. FORWARD FOREIGN EXCHANGE In a forward foreign exchange (FX) contract, two parties contract today for the future exchange of currencies at a forward FX rate. No funds change hands when a typical

More information

CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Explain the basic differences between the operation of a currency

More information

J. Gaspar: Adapted from Jeff Madura, International Financial Management

J. Gaspar: Adapted from Jeff Madura, International Financial Management Chapter5 Currency Derivatives J. Gaspar: Adapted from Jeff Madura, International Financial Management 5. 1 Currency Derivatives Currency derivatives are financial instruments whose prices are determined

More information

The World s Elite Trading School. The Trusted Source for Online Investing and Day Trading Education Since 1994. What is a Forex?

The World s Elite Trading School. The Trusted Source for Online Investing and Day Trading Education Since 1994. What is a Forex? What is a Forex? Forex is the market where one currency is traded for another Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there

More information

International Financial Markets. The spot market for foreign exchange

International Financial Markets. The spot market for foreign exchange Lecture Notes for 15.436 International Financial Markets Chapter 2 The spot market for foreign exchange Fall 1999 Raman Uppal 2-2 International Finance: Chapter 2 Spot exchange market Fall 1999 Road Map

More information

Practice Set and Solutions #1

Practice Set and Solutions #1 Bo Sjö 2012-10-03 Practice Set and Solutions #1 What to do with this practice set? 1 Practice sets are handed out to help students master the material of the course and prepare for the final exam. These

More information

AN INTRODUCTION TO THE FOREIGN EXCHANGE MARKET

AN INTRODUCTION TO THE FOREIGN EXCHANGE MARKET DUKASCOPY BANK SA AN INTRODUCTION TO THE FOREIGN EXCHANGE MARKET DUKASCOPY BANK EDUCATIONAL GUIDE AN INTRODUCTION TO THE FOREIGN EXCHANGE MARKET www.dukascopy.com CONTENTS INTRODUCTION TO FOREX CURRENCY

More information

Trading forex is buying one currency while at the same time selling a different currency.

Trading forex is buying one currency while at the same time selling a different currency. F O R E I G N E X C H A N G E B A S I C S T E R M S U S E D I N F O R E X T R A D I N G The foreign exchange market is global, and it is conducted over-the-counter (OTC) through the use of electronic trading

More information

Determinants of FX Rates: Chapter 2. Chapter Objectives & Lecture Notes FINA 5500

Determinants of FX Rates: Chapter 2. Chapter Objectives & Lecture Notes FINA 5500 Determinants of FX Rates: Chapter 2 Chapter Objectives & Lecture Notes FINA 5500 Chapter Objectives: FINA 5500 Chapter 2 / Determinants of Exchange Rates 1. To be able to explain in your own words why

More information

FX Options NASDAQ OMX

FX Options NASDAQ OMX FX Options OPTIONS DISCLOSURE For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which

More information

FOREIGN EXCHANGE AND CURRENCY

FOREIGN EXCHANGE AND CURRENCY Exchange rates represent the linkage between one country and its partners in the global economy. They affect the relative price of goods being traded (exports and imports), the valuation of assets, and

More information

3. The Foreign Exchange Market

3. The Foreign Exchange Market 3. The Foreign Exchange Market The foreign exchange market provides the physical and institutional structure through which the money of one country is exchanged for that of another country, the rate of

More information

Advanced forms of currency swaps

Advanced forms of currency swaps Advanced forms of currency swaps Basis swaps Basis swaps involve swapping one floating index rate for another. Banks may need to use basis swaps to arrange a currency swap for the customers. Example A

More information

Chapter 14 Foreign Exchange Markets and Exchange Rates

Chapter 14 Foreign Exchange Markets and Exchange Rates Chapter 14 Foreign Exchange Markets and Exchange Rates International transactions have one common element that distinguishes them from domestic transactions: one of the participants must deal in a foreign

More information

Forwards and Futures

Forwards and Futures Prof. Alex Shapiro Lecture Notes 16 Forwards and Futures I. Readings and Suggested Practice Problems II. Forward Contracts III. Futures Contracts IV. Forward-Spot Parity V. Stock Index Forward-Spot Parity

More information

NEW TO FOREX? FOREIGN EXCHANGE RATE SYSTEMS There are basically two types of exchange rate systems:

NEW TO FOREX? FOREIGN EXCHANGE RATE SYSTEMS There are basically two types of exchange rate systems: NEW TO FOREX? WHAT IS FOREIGN EXCHANGE Foreign Exchange (FX or Forex) is one of the largest and most liquid financial markets in the world. According to the authoritative Triennial Central Bank Survey

More information

International Financial Management. Prerequisites

International Financial Management. Prerequisites International Financial Management Prerequisites 1. The quoted interest rate is 5% p.a. What is the effective interest rate for 6 months if the quoted interest rate is a) simple, b) annually compounded,

More information

Forward exchange rates

Forward exchange rates Forward exchange rates The forex market consists of two distinct markets - the spot foreign exchange market (in which currencies are bought and sold for delivery within two working days) and the forward

More information

Getting Started With Forex Trading: A Forex Primer. Member NASD, NYSE, SIPC, and NFA

Getting Started With Forex Trading: A Forex Primer. Member NASD, NYSE, SIPC, and NFA Getting Started With Forex Trading: A Forex Primer Member NASD, NYSE, SIPC, and NFA 1 Important Information and Disclaimer: TradeStation Securities, Inc. seeks to serve institutional and active traders.

More information

Maverick FX Trading. Forex 101 Session #2 Forex Market Basics

Maverick FX Trading. Forex 101 Session #2 Forex Market Basics Maverick FX Trading Forex 101 Session #2 Forex Market Basics Session #1 Review How the currency market works Pairs Trading Building a Trading Plan Session #2 Schedule Understanding PIPs Margin, Margin

More information

Introduction to Forex Trading

Introduction to Forex Trading Introduction to Forex Trading The Leader in Rule-Based Trading 1 Important Information and Disclaimer: TradeStation Securities, Inc. seeks to serve institutional and active traders. Please be advised that

More information

An exchange rate is a price, specifically the relative price of two currencies.

An exchange rate is a price, specifically the relative price of two currencies. CHAPTER I FOREIGN EXCHANGE MARKETS The international business context requires trading and investing in assets denominated in different currencies. Foreign assets and liabilities add a new dimension to

More information

Reading: Chapter 19. 7. Swaps

Reading: Chapter 19. 7. Swaps Reading: Chapter 19 Chap. 19. Commodities and Financial Futures 1. The mechanics of investing in futures 2. Leverage 3. Hedging 4. The selection of commodity futures contracts 5. The pricing of futures

More information

Introduction, Forwards and Futures

Introduction, Forwards and Futures Introduction, Forwards and Futures Liuren Wu Zicklin School of Business, Baruch College Fall, 2007 (Hull chapters: 1,2,3,5) Liuren Wu Introduction, Forwards & Futures Option Pricing, Fall, 2007 1 / 35

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 4110: Sample Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists define risk as A) the difference between the return on common

More information

Module - 16 Exchange Rate Arithmetic: Cross Rates & Triangular Arbitrage

Module - 16 Exchange Rate Arithmetic: Cross Rates & Triangular Arbitrage Module - 16 Exchange Rate Arithmetic: Cross Rates & Triangular Arbitrage Developed by: Dr. Prabina Rajib Associate Professor Vinod Gupta School of Management IIT Kharagpur, 721 302 Email: prabina@vgsom.iitkgp.ernet.in

More information

Chapter 16: Financial Risk Management

Chapter 16: Financial Risk Management Chapter 16: Financial Risk Management Introduction Overview of Financial Risk Management in Treasury Interest Rate Risk Foreign Exchange (FX) Risk Commodity Price Risk Managing Financial Risk The Benefits

More information

Forex Basics brought to you by MatrasPlatform.com

Forex Basics brought to you by MatrasPlatform.com Forex Basics brought to you by MatrasPlatform.com Table of Content What is FOREX... 3 FOREX Basics... 4 Trading Hours... 4 What Is Traded on FOREX?... 4 The Six Majors... 4 Currency Pair Distribution...

More information

Intro to Forex and Futures

Intro to Forex and Futures Intro to Forex and Futures 1 Forex Trading Forex is a term meaning foreign exchange, and refers to trading the currency of one country against the currency from another country simultaneously. Over $1.4

More information

6. Foreign Currency Options

6. Foreign Currency Options 6. Foreign Currency Options So far, we have studied contracts whose payoffs are contingent on the spot rate (foreign currency forward and foreign currency futures). he payoffs from these instruments are

More information

Financial Management in IB. Exercises 1. I. Foreign Exchange Market

Financial Management in IB. Exercises 1. I. Foreign Exchange Market Financial Management in IB Exercises 1 1 I. Foreign Exchange Market Locational Arbitrage Paris Interbank market: EUR/USD 1,2548/1,2552 London Interbank market: EUR/USD 1,2543/1,2546 Is locational arbitrage

More information

The Markit CDS Converter Guide

The Markit CDS Converter Guide The Markit CDS Converter Guide September 21, 2009 Contents Markit CDS Converter... 3 Steps for Use... 3 Interpretation of Results... 4 Email Results... 5 Interest Rate Curve... 5 Comments or Questions...

More information

SOLUTION1. exercise 1

SOLUTION1. exercise 1 exercise 1 Stock BBB has a spot price equal to 80$ and a dividend equal to 10$ will be paid in 5 months. The on year interest rate is equal to 8% (c.c). 1. Calculate the 6 month forward price? 2. Calculate

More information

Currency classifications

Currency classifications 0136PE_Chapter_03 1/5/03 10:52 am Page 25 3 Currency classifications Francesca Taylor, Taylor Associates Introduction Broad classification of currencies Indications of currency classifications Major currencies

More information

Financial-Institutions Management. Solutions 4. 8. The following are the foreign currency positions of an FI, expressed in the foreign currency.

Financial-Institutions Management. Solutions 4. 8. The following are the foreign currency positions of an FI, expressed in the foreign currency. Solutions 4 Chapter 14: oreign Exchange Risk 8. The following are the foreign currency positions of an I, expressed in the foreign currency. Currency Assets Liabilities X Bought X Sold Swiss franc (S)

More information

www.easyforexpips.com

www.easyforexpips.com www.easyforexpips.com What is Forex? Forex simple means FOReign EXchange, If you've ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange

More information

Practice questions: Set #1

Practice questions: Set #1 International Financial Management Professor Michel A. Robe Practice questions: Set #1 What should you do with this set? To help students prepare for the exam and the case, several problem sets with solutions

More information

This is Foreign Exchange Markets and Rates of Return, chapter 4 from the book Policy and Theory of International Finance (index.html) (v. 1.0).

This is Foreign Exchange Markets and Rates of Return, chapter 4 from the book Policy and Theory of International Finance (index.html) (v. 1.0). This is Foreign Exchange Markets and Rates of Return, chapter 4 from the book Policy and Theory of International Finance (index.html) (v. 1.0). This book is licensed under a Creative Commons by-nc-sa 3.0

More information

Index, Interest Rate, and Currency Options

Index, Interest Rate, and Currency Options CHAPTER 3 Index, Interest Rate, and Currency Options INTRODUCTION In an effort to gauge the market s overall performance, industry participants developed indexes. Two of the most widely followed indexes

More information

Currency Derivatives Guide

Currency Derivatives Guide Currency Derivatives Guide What are Futures? In finance, a futures contract (futures) is a standardised contract between two parties to buy or sell a specified asset of standardised quantity and quality

More information

U.S. Dollar Index Contracts

U.S. Dollar Index Contracts U.S. Dollar Index Contracts FAQ June 2015 What is the Dollar Index? The U.S. Dollar Index is a geometrically-averaged calculation of six currencies weighted against the U.S. dollar. The U.S. Dollar Index

More information

Fina4500 Spring 2015 Extra Practice Problems Instructions

Fina4500 Spring 2015 Extra Practice Problems Instructions Extra Practice Problems Instructions: The problems are similar to the ones on your previous problem sets. All interest rates and rates of inflation given in the problems are annualized (i.e., stated as

More information

FxPro Education. Introduction to FX markets

FxPro Education. Introduction to FX markets FxPro Education Within any economy, consumers and businesses use currency as a medium of exchange. In the UK, pound sterling is the national currency, while in the United States it is the US dollar. Modern

More information

FOREX Markets & Trading Currencies

FOREX Markets & Trading Currencies FOREX Markets & Trading Currencies Updates Tonight: FOREX & Demonstra1on of thinkorswim pla9orm Next Week: Stock & Op*ons Trading 101 on March 3 rd Execu1ve Board Applica1ons out now Apply for COO & CMO

More information

Slides for Krugman and Obstfeld Chapter 13

Slides for Krugman and Obstfeld Chapter 13 Slides for Krugman and Obstfeld Chapter 13 Alan G. Isaac American University 2010-09-10 Preview Introduction to Exchange Rates Introductory Concepts International Financial Markets Basics exchange rate

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chatper 34 International Finance - Test Bank MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The currency used to buy imported goods is A) the

More information

Security Bank Treasury FX and Rates Hedging Division Gearing Up for External Competitiveness November 19, 2014. Treasury FXRH

Security Bank Treasury FX and Rates Hedging Division Gearing Up for External Competitiveness November 19, 2014. Treasury FXRH Security Bank Treasury FX and Rates Hedging Division Gearing Up for External Competitiveness November 19, 2014 HEDGING, DERIVATIVES AND SPECULATION HEDGING Making an investment to reduce the risk of adverse

More information

Spot Exchange Markets. Quiz Questions

Spot Exchange Markets. Quiz Questions Chapter Spot Exchange Markets Quiz Questions Q. Using the following vocabulary, complete the following text: forward; market maker or broker; least cost dealing; spot; arbitrage; retail; wholesale. "When

More information

An Overview of the Foreign Exchange Market. 1. Introduction What s Exciting and Interesting About FX?

An Overview of the Foreign Exchange Market. 1. Introduction What s Exciting and Interesting About FX? An Overview of the Foreign Exchange Market 1. Introduction What s Exciting and Interesting About FX? 2. Foreign Exchange Basics Contracts, Actors and Activities 3. Dimensions of the Foreign Exchange Market

More information

Topic Exploration Pack

Topic Exploration Pack Topic Exploration Pack Foreign Exchange Activity 1 Jenny lives in the United Kingdom and is going on a trip round the world. She will travel to France, the United States, Japan, Australia, Thailand and

More information

2. Discuss the implications of the interest rate parity for the exchange rate determination.

2. Discuss the implications of the interest rate parity for the exchange rate determination. CHAPTER 6 INTERNATIONAL PARITY RELATIONSHIPS AND FORECASTING FOREIGN EXCHANGE RATES SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Give a full definition of arbitrage.

More information

An Introduction to. CME Foreign Exchange Products

An Introduction to. CME Foreign Exchange Products An Introduction to CME Foreign Exchange Products What Are Futures and Options? Futures contracts are standardized, legally binding agreements to buy or sell a specific product or financial instrument in

More information

Learning Curve Forward Rate Agreements Anuk Teasdale

Learning Curve Forward Rate Agreements Anuk Teasdale Learning Curve Forward Rate Agreements Anuk Teasdale YieldCurve.com 2004 Page 1 In this article we review the forward rate agreement. Money market derivatives are priced on the basis of the forward rate,

More information

KEY INFORMATION DOCUMENT

KEY INFORMATION DOCUMENT KEY INFORMATION DOCUMENT PSG WEALTH CURRENCY FUTURES TRADING ACCOUNT TRADING ACCOUNT PAGE 0 This document is a summary of key information about the PSG Wealth currency futures trading account. It will

More information

* Test the various investment, portfolio, hedging, and technical trading strategies discussed in class.

* Test the various investment, portfolio, hedging, and technical trading strategies discussed in class. Investment Student: Welcome! You are about to manage an account in the most comprehensive investment simulation available. When you register you will receive a STOCK-TRAK brokerage account with an imaginary

More information

1. HOW DOES FOREIGN EXCHANGE TRADING WORK?

1. HOW DOES FOREIGN EXCHANGE TRADING WORK? XV. Important additional information on forex transactions / risks associated with foreign exchange transactions (also in the context of forward exchange transactions) The following information is given

More information

Sub: Introduction of Australian Dollar, Canadian Dollar and Swiss Francs Currency Futures Contracts

Sub: Introduction of Australian Dollar, Canadian Dollar and Swiss Francs Currency Futures Contracts Notice to all Members, Sub: Introduction of Australian Dollar, Canadian Dollar and Swiss Francs Currency Futures Contracts In pursuance of By-Laws of DGCX, Clearing Rules of DCCC; the following is hereby

More information

CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. How would you define transaction exposure? How is it different from economic

More information

University of Economics Prague Department of International Trade. International Financial Strategies. Content: 1. Foreign Exchange Markets

University of Economics Prague Department of International Trade. International Financial Strategies. Content: 1. Foreign Exchange Markets University of Economics Prague Department of International Trade Josef Taušer Associate Professor Office Hours: See ISIS Email: tauser@vse.cz 1 International Financial Strategies Content: 1. Foreign Exchange

More information

Understanding World Currencies and Exchange Rates

Understanding World Currencies and Exchange Rates Understanding World Currencies and Exchange Rates Contents Currencies Exchange Rates Exchange Rate Movements Interpreting Numerical Exchange Rate Movements How Foreign Exchange Markets Work Why Exchange

More information

Foreign Currency Account. Easily manage foreign currencies

Foreign Currency Account. Easily manage foreign currencies Foreign Currency Account Easily manage foreign currencies Contents 2 What s a foreign currency account? 2 Why open an ASB Foreign Currency Account? 3 Managing your account 3 What are the fees? 4 Interest

More information

4. ANNEXURE 3 : PART 3 - FOREIGN EXCHANGE POSITION RISK

4. ANNEXURE 3 : PART 3 - FOREIGN EXCHANGE POSITION RISK Annexure 3 (PRR) - Part 3, Clause 18 - Foreign Exchange Position Risk Amount 4 ANNEXURE 3 : PART 3 - FOREIGN EXCHANGE POSITION RISK (a) CLAUSE 18 - FOREIGN EXCHANGE POSITION RISK AMOUNT (i) Rule PART 3

More information

CommSeC CFDS: IntroDuCtIon to FX

CommSeC CFDS: IntroDuCtIon to FX CommSec CFDs: Introduction to FX Important Information This brochure has been prepared without taking account of the objectives, financial and taxation situation or needs of any particular individual.

More information

Mechanics of Foreign Exchange - money movement around the world and how different currencies will affect your profit

Mechanics of Foreign Exchange - money movement around the world and how different currencies will affect your profit Dear Business Leader, Welcome to the Business Insight Seminars an exclusive, informational series to help you gain a powerful edge in today s highly competitive business environment. Our first topic in

More information

VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS

VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS Graduate School of Business Administration University of Virginia VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS Interest-rate swaps have grown tremendously over the last 10 years. With this development,

More information

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board Condensed Interim Consolidated Financial Statements of Canada Pension Plan Investment Board September 30, 2015 Condensed Interim Consolidated Balance Sheet As at September 30, 2015 As at September 30,

More information

Chapter 11. Managing Transaction Exposure. Lecture Outline

Chapter 11. Managing Transaction Exposure. Lecture Outline Chapter 11 Managing Transaction Exposure Lecture Outline Transaction Exposure Identifying Net Transaction Exposure Adjusting the Invoice Policy to Manage Exposure Hedging Payables Forward or Futures Hedge

More information