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International Finance - Coggle Diagram
International Finance
- Rational for international investment:
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Buy Vs Sell rate
Forex for USD: Buying 3.90, Selling 4.13: => bank will buy USD at MYR3.90 but sell USD at MYR4.13. If you have MYR1000 to exchange, how much USD will you receive?
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- list down as relevant cash flows in foreign currency; 2. covert them into local currency using IFE Fisher formula; 3. discount cash flows using local required rate of return
S0=10.91 Ps/$, RFC=8% or 0.08; RHC=4%, E(St)=10.91[1+0.08-0.04]^t hence E(S1)=10.91x1.04=11.35, E(S2)=10.91x1.04^2=11.80 etc
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- Risk of foreign investment
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- Theories on exchange rate
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Interest Rate Parity
An implied forward rate F to prevent arbitrage arise from differential in interest rate R and spot S exchange rate
F1/S0 = (1+RFC)/(1+RHC) or Approx. F1/S0= 1+(RFC-RHC) where RFC: nominal rate in foreign country; RHC: nominal rate in home country. F1: forward exchange rate, S0: spot exchange rate
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- Form of foreign investment
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