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ITF (Lecture 6) Foreign exchange and exchange rate determination, Foreign…
ITF (Lecture 6) Foreign exchange and exchange rate determination
Foreign exchange and risk management
Foreign exchange market
Types of foreign exchange transactions
Forward transactions
Currency swaps
Spot market
Interbank trading
Bank profits on transactions
Reading foreign exchange quotations
Cross exchange rate
Forward and future markets
Forward contract vs Futures contract
Foreign currency options
Exchange rate determination
Supply for foreign exchange
Equilibrium rate of exchange
Demand for foreign exchange
Advantages and Disadvantages of a (Strength/Weakenesses) Dollar
Nominal exchange rate index
Real exchange rate
Arbitrage
Example of two-point arbitrage
Example of three-point arbitrage
Forward market
Relationship between forward rate and spot rate
Managing your foreign exchange risk: forward foreign exchange market
Uncovered interest arbitrage
Covered interest arbitrage
Foreign exchange market speculation
Exchange rate determination
What determines exchange rates?
factors that cause the supply and demand schedules of currency to change
market fundamentals
market expectations
factors affecting e/r
medium run
long run
short run
Determining long run e/r
relative price levels
relative productivity
foreign preferences
trade barrier
law of one price
PPP
determining short run e/r=the asset market approach
relative interest rate
expected change in e/r
Types of foreign exchange transactions
Spot
Swap
Forward
Exchange rate determination
Real and nominal e/r
Relationship between forward rate and spot rate
Arbitrage
Foreign exchange market
Exchange rate quotations
The way to quote e/r
Forward and future markets
Options
Interest arbitrage, currency and hedging, speculation