Please enable JavaScript.

Coggle requires JavaScript to display documents.

Foreign Exchange Markets (Demand & Supply (Demand (derived from…

- - - - The price of one's currency in terms of another
- - - - exchange rates are set by market forces, without government intervention
    - - allows govt to conduct
        independent fiscal & monetary policy
        
        BOP SURPLUS: currency will APPRECIATE
        
        BOP DEFICIT: currency
        will DEPRECIATE
      - Gov. conc. on domestic policy than
        worry bout their BOP actions
    - - Currency is subject to fluctuations & speculations
  - - - Rate at which it's fixed or "pegged" is its "par value"
      - Fixed against a "reference currency"
        e.g. against the US
    - - Provide
        currency stability
        
        Aid growth in trade
        
        less risk for business
      - discourage currency speculation
    - - requires a central bank to maintain international reserves
        
        If BOP is in deficit, gov will sell its international reserves
        
        burden: low ability to foreign debt
      - requires country to follow monetary & fiscal policy
        
        Good: fighting inflation
        
        Bad: slow down economic growth
        
        If BOP is in deficit, gov will buy back its own currency
- - - - E.g. bankers, brokers
    - - requiring various currencies
        for both import & exports
  - - - Spot Rate
        
        Exchange Rate requiring delivery of traded currency within two business days
      - Forward Rate
        
        Rate at which 2 parties will exchange currencies on a specified future date
        
        Derivative: values are derived from other commodities/financial instruments
        
        Premium vs Discount: premium trade if higher than the spot rate, or disc. if vice versa.
- - - - Definition
        
        when financial benefits & costs of international transaction
        is affected by: xchange rate mvmts that occur AFTER firm complies to complete transaction
        
        specific time frame affects transaction made
      - Reduced by HEDGING
        
        Forward currency Contract
        
        enter forward contract with a bank
        
        exchange rate will be a specific rate at a future date
        
        uncertainty is removed: xchange rate is PREDETERMINED
        
        Currency future Contract
        
        enter into futures contract using a broker
        
        similar to prev. but future contracts
        can be traded into futures market
        as a commodity
        
        can sell this future contract off if it decides not to hold contract till maturity date
        
        Currency option Contract
        
        similar to forward contract
        but currency option is a right
        NOT an obligation
        
        can enter into a contract with a bank
        but has the option to not fulfill the contract
        
        This negates transaction risk
        allowing possible foreign exchange gain
    - - exchange rate risk associated with companies that deal in foreign currencies or list foreign assets on their balance sheets
      - during the consolidation of accounts,
        there may be a loss due to translation risk
      - reduce risk by
        
        Use Balance sheet Hedge
        
        MNC matches assets and liabilities
        denominated in the SAME currency.
    - - Definition
        
        E.g. Sg invests in Indo during 1997 currency crisis, IDR depreciated more than 50%
        
        long terms investments, property are vulnerable
        
        impact on the value of a firm's operations
        of unanticipated xchange rate changes
      - Reduce risk by
        
        Diversification of Operations
        
        diversify production locations
        amongst many countries
        
        minimise economic problems in a single economy
        
        Export-oriented productions
        
        not fully exposed to poor market conditions
        
        valuable foreign currency can be earned
        
        Diversification of Financing
        
        MNC take financing in several currencies
        not fully exposed to sudden movements of:
        FX or interest rates in any single currency