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Foreign .. exchange..
INTERNATIONAL TRADETopic-7
Spot rate, forward exchange rate, currency swap,
speculation, hedging and some imp points
Exchange of domestic currency with the rest of
the world.
The mejor financial centers are New York,
London, Bonn and Tokyo.
London is the largest mkt.(90 bn $ each day)
Components of foreign exchange
1.Spot rate
The spot rate is the purchase and sale of
commodity, security, or currency for immediate
delivery and payment on the spot date.
Which is normally two business days after the
agreement.
This types of transaction called spot transaction.
2.Forward exchange rate.
This involves an agreement today to buy and sell a
specific amount of a foreign currency, commodity
at specific future date.
Future contract are for one month, three months
and 6 months ,
3, months contracts is more common.
2.Forward exchange rate.
1.Forward discount. 2.Forward premium
If the forward exchange rate is is below
to the present spot rate with respect to
domestic currency.
It is negative terms.
If the forward exchange rate is is above
to the present spot rate .
It is positive terms.
3.Currencty swap
It refer to a spot sale of a currency combined with
a forward purchase of same currencty.
The swap rate is the difference bw the spot and
forward rate in currency swap.
4.Speculation
Speculation is related with gambling.
Speculator who expect spot rate to rise in future, buy
currency in forward mkt and sold when spot rate
increase.
The speculation in foreign exchange make the spot and
forward rate move together.
Speculation involve high risk ,in expectation of high
returns.
Its main motive is to take maximum advantage from
fluctuations in the mkt.
5.Hedging
Hedging is the protection for company to minimize
or eliminate foreign exchange risk.
Hedging is the process of covering foreign exchange
risk.
6.Rybczynski theorem
In H-O theory and factor price equalization theory – the
factor endowment(supply) were fix.
k
L
kO’
OL’
Only labour supply increases capital supply constant.
- Output of labour increases but capital decreases.
Factor price constant.
Output increase only by increasing factor and output of
other factor will decreases.
The most significant effect of increase in supply f factor
is- increasing volume of production.
Acc. To this theorem – increase in the supply of one
factor will affect the production, consumption and TOT
and other factor remain same.(fix)
TOT become unfavorable for the country whose factor
has become expending.
Conclusion – supply of one factor increased other factor
constant but price ratio remain unchanged.
7.Optimum currency area
This concept is given by Mead, T.Scitovsky in (1958).
Further developed by Mundell(1961) and Mcknnon in
1963.
Acc. To Mundell OCA is region which leads automatically
elimination of unemployment and BOP disequilibrium.
In OCA either there is common currency or the group of
currencies of different countries are linked, through fix
exchange rate.
The currency of member country float jointly with non
member countries.
Free mobility of labour and capital through currency area.
Higher ratio of foreign trade to GNP more beneficial to
currency area..
OCA is defined as optimal geographical area for a single
currency .
In OCA currencies of member nations are fixed(pagged)
6.The eauro
Euro started in 1 jan 1999.
Circulation of coin and notes start from 1 jan 2002.
The euro currency market.
It is a market where european currencies , US dollar,
Germen Mark, British pound, Japanese yen are
transacted.
These currencies are out of control of central authority.
Euro dollar market.
Holding the U.S. dollar in europeon financial center like –
London ,Paris ,etc.
Ig- U.S. dollar deposit in outside the united state.
Euro currency market.
Deposit in bank that are located outside the border of the
country.
ie. Japanese yen held in brazil.
Chinese Yuan held in U.S.A.
Four main Euro currencies are- USD, euro, Yen, and
Pound.
These are financial institute anywhere in the world which
accept deposit or make loans in any foreign currency.
Euro banks..
Some prev. year Ques.
Euro dollar market.
Holding the U.S. dollar in europeon financial center like –
London ,Paris ,etc.
Ig- U.S. dollar deposit in outside the united state.
Euro currency market.
Deposit in bank that are located outside the border of the
country.
ie. Japanese yen held in brazil.
Chinese Yuan held in U.S.A.
Four main Euro currencies are- USD, euro, Yen, and
Pound.
2.Forward exchange rate.
This involves an agreement today to buy and sell a
specific amount of a foreign currency, commodity
at specific future date.
Future contract are for one month, three months
and 6 months ,
3, months contracts is more common.
5.Hedging
Hedging is the protection for company to minimize
or eliminate foreign exchange risk.
Hedging is the process of covering foreign exchange
risk.
Theories of development
Growth and development.Topic- 1
1.A.Smith, 2.Recardo,3.malthus 4.schumpeter, 5 Rostrow
3.Theories of development
4.schumpet
er’s
innovation
theory
2.Malthus
theory
1.Adam
Smith
theory
3.David
Ricardo
theory
5.Rostow’s
model
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