Popular in International Economic Policy
Popular in Economcs
verified elite notetaker
This 0 page Bundle was uploaded by Terence Hughes on Thursday December 17, 2015. The Bundle belongs to ECON 3000 at Fordham University taught by Giacomo Santangello in Fall 2015. Since its upload, it has received 25 views. For similar materials see International Economic Policy in Economcs at Fordham University.
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 12/17/15
Foreign Exchange Foreign exchange market international market for foreign currencies to be traded 0 functions 0 transferring of purchasing power between currencies 0 provide credit for foreign transactions 0 Participants in the market 0 those needing currency to transaction foreign investment or tourism 0 commercial banks 0 Foreign exchange brokers people at airports and such 0 central banks buyer or seller of last resort in the foreign exchange market 0 Supply and demand model 0 use of the dollar at the international currency 0 Depreciation increase in the domestic currency price of a foreign currency l the euro falls due to a decrease in the role of the dollar as the international currency More dollars are required to buy Euros gt the dollar has weakened or depreciated Types of exchange rates 0 Spot exchange rate the exchange rate that calls for payment and receipt of foreign exchange within two business days from the date when the transaction was made 0 Forward exchange rate exchange rate that calls for delivery of the foreign exchange one three six twelve or twentyfour months after the date the contract is signed I can be discounted forward rate is below the exchange rate I can be premium forward rate is above the spot rate 0 Cross exchange rate exchange rate between currencies A and B given the exchange rate between currency A and C and between B and C 0 Effective exchange rate exchange rate that is a weighted average of the exchange rates between the domestic currency and the nation39s most important trading partners 0 Difference in exchange rates in different markets are closed by arbitrage O arbitrage purchase of currency in one market for immediate resale in another market 0 Foreign Exchange Futures 0 forward currency contracts for standardized currency amounts and select dates I has to be in certain amounts I can only take place on certain days Foreign Exchange Risk Q in the absence of a significant exchange rate intervention exchange rates fluctuate significantly over time Q risks of exchange rate movements 0 contract future foreign currency payments may become more expensive if the domestic currency falls in value Hedging the avoidance of foreign exchange risk 0 buy at the current spot rate and deposit the receipts in an interest earning account until the funds are needs 0 buy a forward contract 0 buy a call option Speculation the acceptance of the foreign exchange risk in the hope of making a profit 0 stabilizing speculation speculation that acts to moderate fluctuations in currency values 0 destabilizing speculation speculation that serves to amplify fluctuations in exchange rate values Interest Arbitrage 0 transfer of shortterm liquid funds abroad to earn a higher rate of return 0 covered interest arbitrage occurs when the transfer abroad does not entail exchange rate risk gt because it is without risk all pro table movements of funds should occur 0 Suppose the spot rate is 1001 0 Converting 1000 at this rate yields 100000 Q If interest rates in Japan are 8 vs 5 in the US in one year the funds in Japan will earn 8000 vs 50 in the US Q If a forward contract to sell 108000 was initially signed at the rate of 1011 106931 will be obtained This is greater than the 1050 that would have been obtained in the US O uncovered interest arbitrage occurs when transfer abroad does entail exchange rate risk
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'