Consider the circuit in Fig. 7.103. Given that find and for v t 7 0. vo vo x (0) 10 V,
International Finance Chapter 3 International Financial Markets Overview: This chapter covers various aspects of exchange rates, from the beginning of the foreign exchange market to the hedging practices of multinational corporations. Foreign exchange market – allows for the exchange of one currency for another Before the emergence of the foreign exchange market, there was something called the Gold Standard. The Gold Standard was used mainly between the years of 1876-1913; what it did was made each currency convertible into gold at a specified rate. The exchange rate of two currencies was determined by their relative convertibility rate per ounce of gold.After World War I, however, that practice actually began to drop off, especially during the time of the Great Depression inAmerica. In 1944, the Bretton WoodsAgreement called for fixed exchange rates between currencies; in 1971 the US dollar had become overvalued where supply drastically outweighed demand. The Smithsonian Agreement stated that the US dollar was to be devalued relative to other major currencies.As the years went on, countries eventually forgot that practice and instead switched to a floating exchange rate system, which allowed the market to control rates. Spot rate – exchange rate at which one currency is traded for another in the spot market Liquidity – level of trading activity Liquidity is very important when it comes to the currency trading market. Developed countries such as the US and England tend to have very high liquidity whereas more developing ones have lower liquidity, because they are not being traded as much. When trading, there are many characteristics of the banks that must be considered such as: 1.)Competitiveness of quote 2.)Special relationship with the bank 3.) Speed of execution 4.) Advice about current market conditions 5.) Forecasting advice It is also important to understand the bid/ask spread. The ask price is the sell quote, and the bid price is the buy quote; therefore, the ask price will always be bigger. The factors that affect spread are order costs, inventory costs, competition, volume, and currency risk. You calculate the bid/ ask spread by using the following equation: Bid/Ask = ask rate – bid rate ask rate Direct quotations – number of dollars per unit of foreign currency Indirect quotations – number of units of foreign currency per dollar Indirect quotation = 1/ direct quotation There are other types of currencies that are frequently traded in the market like currency derivatives, which are contracts with a price that is partially derived from the value of the underlying currency. There are forwards and futures contracts, as well as call and put options.A forward contract is an agreement between an MNC and a foreign exhange dealer that specifies the currencies to be exchanged, the exchange ratem and the date that the transaction will occur.A futures contract is similar to a forwards, but it is traded on an exchange and also specifies the standard volume of the currency. Options are a bit different and are a more relaxed way of trading.Acall option is a right to buy and is used to hedge payables, whereas a put option is a right to sell and is used to hedge receivables. Options are more relaxed because they do not pose an obligation to act; a person could always choose not to exercise that right, unlike forwards/futures where you must fulfull that contract. Eurodollars – dollar deposits in banks in Europe London Interbank Offer Rate – rate most often charged for very short-term loans between bank Single European Act allowed capital to flow freely throughout Europe, banks to offer a wide variety of lending and leasing, and regulations regarding competition and taxes to be the same. Banks in countries that were subject to lower capital requirements had a competitive advantage over other banks because they could grow more easily.The BankAccord (1988) required that capital be at least 6% of total risk weighted assets. All international funds carry risks such as 1.) Interest rate risk 2.)Exchange rate risk 3.)Liquidity risk 4.)Credit risk Market characteristics vary among countries when it comes to rights, legal protection, government enforcement, and accounting laws.