INTERNATIOANAL FINANCE.pptVIP

Relative Concepts Examples Depreciation and Appreciation All else equal, a depreciation of a country’s currency makes its goods cheaper for foreigners. Foreign Exchange Market Defination: Framework of the Market (I) Framework of the Market (II) Characteristics of the Market Spot Rates Forward Rates Spot Exchange Rates: Exchange rates governing such “on-the-spot” trading. (two days after a deal is struck) Forward Exchange Rates: Exchange rates deals sometimes specify a value date farther away than 2days-- 30days , 90days,180days,or even several years. Foreign Exchange Swaps Foreign Exchange Swaps: a spot sale of a currency combined with a forward repurchase of the currency Currency Futures Futures: a future contract means a promise that a specified amount of foreign currency will be delivered on a specified date in the future Currency Options Options: gives its owner the right to buy or sell a specified amount of foreign currency at a specified price at a specified expiration date Demand for Foreign Currency Assets Asset Asset Returns Interest Rates Exchange Rates Asset Returns A Simple Rule Return, Risk, and Liquidity in the Foreign Exchange Market Exchange Rate Asset Returns Rate of return: The percentage increase in value it offers over some period. Invest 100$ to buy a share of stock and the dividend is 1$. If the price rise to 109 $ or drop to 89 $. (109 +1)/100 –1 = 10% (89 + 1)/100 –1 = – 10% Expected rate of return (P.334) Equilibrium in the FX Market Interest Parity How changes in E affect expected returns (I) How changes in E affect expected returns (II) How changes in E affect expected returns (III) How changes in E affect expected returns (IV) The Equilibrium Exchange Rate Interest Rates, Expectations Equilibrium (I) The Effect of Changing Interest Rates on the Current Exchange Rate The Effect of Changing Interest Rates on the Current Exchange Rate All else equal, a rise in the foreign interest rate causes th