Professional Documents
Culture Documents
FOFch 17
FOFch 17
FOFch 17
17:
International
Business
Finance
£/$ Supply of
(price of Dollars
dollars)
Quantity of dollars
What Determines Exchange Rates?
£/$ Supply of
(price of Dollars
dollars)
Quantity of dollars
What Determines Exchange Rates?
Another example:
Quantity of dollars
What Determines Exchange Rates?
Supply of
Dollars
¥/$
(price of
dollars)
Quantity of dollars
Foreign Exchange Markets
Different exchange rates are used for
different types of transactions:
1) Spot Exchange Market: deals with
currency for immediate delivery.
The exchange rate used in spot transactions
is called the spot exchange rate.
If you need 500,000 francs to buy imports,
and the spot exchange rate is .1457, you
would pay your bank $72,850.
Foreign Exchange Markets
=[ ] [ n ] x 100
premium forward - spot 12
or discount spot
Forward-Spot Differential
For our example,
Forward-Spot Differential
For our example,
=[ ] [ n ] x 100
premium forward - spot 12
or discount spot
Forward-Spot Differential
For our example,
=[ ] [ n ] x 100
premium forward - spot 12
or discount spot
=[ .1476 - .1457
.1457
] [ ] x 100
12
6
Forward-Spot Differential
For our example,
=[ ] [ n ] x 100
premium forward - spot 12
or discount spot
=[ .1476 - .1457
.1457
] [ ] x 100
12
6
Risks
Political Risk - firms must be aware
that many foreign governments are
not as stable as the U.S.
Exchange Rate Risk - exchange rate
changes can affect sales, costs of
goods sold, etc. as well as the firm’s
profit in dollars.