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