文档介绍：International Business
Lecture 6
Foreign Exchange Market
Introduction
Foreign exchange market: a market for converting the currency of one country into the currency of another.
Exchange rate: the rate at which one currency is converted into another
Foreign exchange risk: the risk that arises from changes in exchange rates
The Functions of the Foreign Exchange Market
The foreign exchange market serves two main functions:
Convert the currency of one country into the currency of another
Provide some insurance against foreign exchange risk
Foreign exchange risk: the adverse consequences of unpredictable changes in the exchange rates
Currency Conversion
Consumers pare the relative prices of goods and services in different countries using exchange rates
International business have four main uses of foreign exchange markets
To exchange currency received in the course of doing business abroad back into the currency of its home country
To pay a pany for its products or services in its country’s currency
To invest excess cash for short terms in foreign markets
To profit from the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates, also called currency speculation
Currency Conversion
Currency speculation:
Consider a . company with $10 million to invest for three months.
Suppose pany suspects that the . dollar is overvalued against yen. That is, pany expects the value of the dollar to depreciate (fall) against that of the yen.
Imagine the current dollar/yen exchange rate is $1 = ¥ 120.
pany exchanges its $10 million into yen, receiving ¥ billion.
Over the next 3 months, the value of the dollar depreciates against the yen until $1 = ¥100.
Now pany exchanges its ¥ billion back into dollars and finds that it has $12 million.
Insuring against Foreign Exchange Risk
A spot exchange occurs when two parties agree to exchange currency and execute the deal immediately (Jan 11, 05)
The spot exchange