Chapter 31. THE MARKET FOR FOREIGN EXCHANGE RATE RISK CONTROL INSTRUMENTS. Foreign Exchange Rates. The amount of one currency that can be exchanged for a unit of another currency Exchange Rate Quotation Conventions Direct quote Indirect quote. Foreign Exchange Risk. - PowerPoint PPT Presentation
Text of Chapter 31
THE MARKET FOR FOREIGN EXCHANGE RATE RISK CONTROL
Foreign Exchange Rates
The amount of one currency that can be exchanged for a unit of another currency
Exchange Rate Quotation Conventions Direct quote Indirect quote
Foreign Exchange Risk
Foreign exchange risk refers to the risk of adverse movements in the exchange rate. Assets denominated in a foreign
currency expose investors to exchange rate risk.
Liabilities denominated in foreign currency expose borrowers to exchange rate risk.
The market for the settlement of foreign exchange transactions within two business days. Appreciation Depreciation American terms European terms
Spot Exchange Rates
Foreign exchange rates between major currencies are free to float, with market forces determining the relative value of a currency.
Spot exchange rates adjust to compensate for the relative inflation rate between two countries.
The exchange rate between two countries except the U.S.Dollar price of currency XDollar price of currency Y
Cross rate mispricing leads to triangular arbitrage it involves positions in three currencies
Foreign Exchange Dealers
Large international banks act as dealers in the foreign exchange market
Dealers are linked by telephone and cable and various information transfer services