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The Foreign Exchange Market

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Robin Kapoor
Robin Kapoor
EmpresarialesEconomía y finanzas
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The Foreign Exchange Market
Functions of Forex Market ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Participants in Forex Market: ,[object Object],[object Object],[object Object],[object Object]
Participants in Forex Market: ,[object Object],[object Object],[object Object],[object Object],[object Object]
Entities in Forex market ,[object Object],[object Object],[object Object]
The Foreign Exchange Rates ,[object Object],[object Object],[object Object],[object Object]
The Foreign Exchange Rates ,[object Object],[object Object],[object Object],[object Object]
The Foreign Exchange Rates X axis- Quantity of pounds Y axis- exchange rate i.e. R R= $/£
Analysis: ,[object Object],[object Object],[object Object],[object Object],[object Object]
Analysis: ,[object Object],[object Object],[object Object],[object Object],[object Object]
Analysis: ,[object Object],[object Object]
Factors that affect the Equilibrium Exchange Rate ,[object Object],[object Object],[object Object]
Factors that affect the Equilibrium Exchange Rate ,[object Object],[object Object],[object Object],[object Object],[object Object]
Factors that affect the Equilibrium Exchange Rate ,[object Object],[object Object],[object Object],[object Object]
Exchange Rate Quotations: ,[object Object],[object Object],[object Object]
Exchange Rate Quotations: ,[object Object],[object Object],[object Object],[object Object]
Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote UK Pound Sterling £/ GBP 66.92 US US Dollar $ 43.30 Canada Canadian Dollar Can$ 29.10
Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote UK Pound Sterling £/ GBP 66.92 0.0149 US US Dollar $ 43.30 0.0231 Canada Canadian Dollar Can$ 29.10 0.0344
Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Germany Deutschmark DM/DEM 22.94 Euro € 44.87 Netherlands Dutch Guilder DG/$f/ NLG 20.36
Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Germany Deutschmark DM/DEM 22.94 0.0436 Euro € 44.87 0.0223 Netherlands Dutch Guilder DG/$f/ NLG 20.36 0.0491
Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Switzerland Swiss franc sFr 0.0358 France French franc FF/ FRF 0.1462 Italy Swedish krona SKr 0.1931
Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Switzerland Swiss franc sFr 27.97 0.0358 France French franc FF/ FRF 6.84 0.1462 Italy Swedish krona SKr 5.18 0.1931
Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Italy Italian lira Lira/ Lit/ ITL 43.2901 Japan Japanese Yen ¥ 2.4994 Australia Australian dollar AU$ 0.0360
Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Italy Italian lira Lira/ Lit /ITL 0.0231 43.2901 Japan Japanese Yen ¥ 0.4001 2.4994 Australia Australian dollar AU$ 27.76 0.0360
Numerator and Denominator ,[object Object],[object Object],[object Object]
Buying and selling a currency ,[object Object],[object Object],[object Object]
Bid and Ask Rates ,[object Object],[object Object],[object Object],[object Object],[object Object]
Causes of spread are: ,[object Object],[object Object],[object Object],[object Object]
Important conventions regarding quotes: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Interbank quote vs Merchant quote ,[object Object],[object Object],[object Object]
Basis Point (BPS) ,[object Object],[object Object]
Basis Point (BPS) ,[object Object]
Cross Rates / Synthetic rates ,[object Object],[object Object]
Cross Rates ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cross Rates ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Appreciation & Depreciation ,[object Object],[object Object],[object Object]
Appreciation & Depreciation ,[object Object],[object Object],[object Object]
The Foreign Exchange Market ,[object Object],[object Object],[object Object]
Premium / Discount ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Arbitrage ,[object Object],[object Object]
Arbitrage ,[object Object],[object Object],[object Object]
Interest Arbitrage ,[object Object],[object Object],[object Object]
Uncovered Interest Arbitrage ,[object Object],[object Object],[object Object],[object Object]
Covered Interest Arbitrage ,[object Object],[object Object],[object Object]
Illustration 1 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Solution to Illustration1 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Solution to Illustration1 ,[object Object],[object Object],[object Object]
Solution to Illustration1 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Solution to Illustration1 ,[object Object],[object Object],[object Object],[object Object]
Illustration 2 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Solution to Illustration 2 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Solution to Illustration 2 ,[object Object],[object Object],[object Object]
Solution to Illustration 2 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Illustration 3 ,[object Object],[object Object],[object Object],[object Object],[object Object]
Illustration 4 ,[object Object],[object Object],[object Object],[object Object],[object Object]
Purchasing Power Parity (PPP) ,[object Object],[object Object],[object Object],[object Object]
Absolute Purchasing Power Parity ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Absolute Purchasing Power Parity ,[object Object],[object Object],[object Object]
Relative Purchasing Power Parity ,[object Object],[object Object],[object Object],[object Object]
Problems in Relative PPP ,[object Object],[object Object]
International Fisher Effect (IFE) ,[object Object],[object Object]
International Fisher Effect (IFE) ,[object Object],[object Object]
International Fisher Effect (IFE) ,[object Object],[object Object],[object Object]
International Fisher Effect (IFE) ,[object Object]
Foreign Exchange Risk ,[object Object],[object Object]
Types of Exposure ,[object Object],[object Object],[object Object]
1. Translation exposure ,[object Object],[object Object]
1. Translation exposure ,[object Object]
1. Translation exposure ,[object Object],[object Object],[object Object],[object Object]
Measurement of Translation exposure ,[object Object]
Example ,[object Object],[object Object],[object Object],[object Object]
Example ,[object Object],[object Object],[object Object],[object Object],[object Object]
Transaction exposure ,[object Object],[object Object]
Transaction exposure ,[object Object],[object Object]
Economic Exposure ,[object Object],[object Object],[object Object],[object Object]
Tools & Techniques of Foreign Exchange Risk Management ,[object Object],[object Object],[object Object],[object Object]
Management of Translation exposure ,[object Object],[object Object]
Management of Translation exposure- Example ,[object Object]
Management of Translation exposure- solution ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Translation Methods ,[object Object],[object Object],[object Object],[object Object]
1. The Current Rate Method ,[object Object],[object Object]
1. The Current Rate Method ,[object Object],[object Object],[object Object]
2. The Monetary/ Non- Monetary Method ,[object Object],[object Object]
2. The Monetary/ Non- Monetary Method ,[object Object],[object Object]
3. Temporal Method ,[object Object],[object Object],[object Object],[object Object]
4. The Current/ Non- Current Method ,[object Object],[object Object]
Functional vs Reporting Currency ,[object Object],[object Object]
Functional vs Reporting Currency ,[object Object]
Conclusion ,[object Object]
Management of Economic Exposure ,[object Object]
Measuring Economic Exposure ,[object Object]
Measuring Economic Exposure ,[object Object],[object Object]
Managing Economic Exposure ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Managing Economic Exposure ,[object Object],[object Object],[object Object],[object Object],[object Object]
Market selection ,[object Object],[object Object]
Product strategy ,[object Object],[object Object],[object Object]
Promotional strategy ,[object Object]
Pricing Strategy- Market Share vs Profit Margin ,[object Object]
Input Mix ,[object Object]
Shifting production among plants ,[object Object],[object Object]
Plant location
Raising Productivity ,[object Object]
Corporate philosophy for Exposure Management Active trading Selective hedging All exposures hedged All exposures left unhedged High reward Low reward High risk Low risk
Multinational Cash Management
Multinational Cash Management ,[object Object],[object Object],[object Object]
Objective of an efficient system: ,[object Object],[object Object],[object Object],[object Object],[object Object]
Techniques to Optimise Cash Flows ,[object Object],[object Object],[object Object],[object Object],[object Object]
Accelerating cash inflows ,[object Object],[object Object],[object Object]
Managing blocked funds ,[object Object],[object Object]
Leading and Lagging ,[object Object]
Leading & Lagging- advantages ,[object Object],[object Object],[object Object]
Example ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Example- solution ,[object Object],[object Object],[object Object],[object Object]
Netting ,[object Object],[object Object],[object Object]
Advantages of Netting ,[object Object],[object Object],[object Object],[object Object]
Types of Netting ,[object Object],[object Object]
Bilateral Netting System ,[object Object],[object Object]
Bilateral Netting System US Parent German Affiliate US Parent German Affiliate Pay $ 30,000 Pay $ 40,000 Pay $ 10,000 After Bilateral Netting
Multinational Netting System ,[object Object],[object Object]
Multinational Netting System X Y Z $ 20 m $ 20 m $ 20 m
Country Risk Analysis
Political Risk Indicators ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Economic Risk Indicators ,[object Object],[object Object],[object Object],[object Object],[object Object]
Techniques to assess Country Risk ,[object Object],[object Object]
Techniques to assess Country Risk ,[object Object],[object Object],[object Object],[object Object],[object Object]
Techniques to assess Country Risk ,[object Object],[object Object],[object Object],[object Object]
Techniques to assess Country Risk ,[object Object],[object Object],[object Object],[object Object]
Techniques to assess Country Risk ,[object Object],[object Object],[object Object],[object Object]
Techniques to assess Country Risk ,[object Object],[object Object]
Techniques to assess Country Risk ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Techniques to assess Country Risk ,[object Object],[object Object]
Techniques to assess Country Risk ,[object Object],[object Object],[object Object],[object Object]
Techniques to assess Country Risk ,[object Object],[object Object],[object Object],[object Object]
Techniques to assess Country Risk ,[object Object],[object Object],[object Object],[object Object]
Cost of Capital & Capital Structure
Cost of capital ,[object Object],[object Object],[object Object]
Cost of capital for MNCs vs Domestic firms ,[object Object],[object Object]
Cost of capital for MNCs vs Domestic firms ,[object Object]
Cost of capital for MNCs vs Domestic firms ,[object Object],[object Object]
Cost of capital for MNCs vs Domestic firms
Cost of capital for MNCs vs Domestic firms
Cost of capital for MNCs vs Domestic firms
Cost of capital for MNCs vs Domestic firms
 
[object Object]

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The Foreign Exchange Market

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  • 7.
  • 8. The Foreign Exchange Rates X axis- Quantity of pounds Y axis- exchange rate i.e. R R= $/£
  • 9.
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  • 17. Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote UK Pound Sterling £/ GBP 66.92 US US Dollar $ 43.30 Canada Canadian Dollar Can$ 29.10
  • 18. Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote UK Pound Sterling £/ GBP 66.92 0.0149 US US Dollar $ 43.30 0.0231 Canada Canadian Dollar Can$ 29.10 0.0344
  • 19. Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Germany Deutschmark DM/DEM 22.94 Euro € 44.87 Netherlands Dutch Guilder DG/$f/ NLG 20.36
  • 20. Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Germany Deutschmark DM/DEM 22.94 0.0436 Euro € 44.87 0.0223 Netherlands Dutch Guilder DG/$f/ NLG 20.36 0.0491
  • 21. Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Switzerland Swiss franc sFr 0.0358 France French franc FF/ FRF 0.1462 Italy Swedish krona SKr 0.1931
  • 22. Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Switzerland Swiss franc sFr 27.97 0.0358 France French franc FF/ FRF 6.84 0.1462 Italy Swedish krona SKr 5.18 0.1931
  • 23. Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Italy Italian lira Lira/ Lit/ ITL 43.2901 Japan Japanese Yen ¥ 2.4994 Australia Australian dollar AU$ 0.0360
  • 24. Exchange Rate Quotations: Spot rates for a number of currencies (in Rupees) Country Currency Symbol Direct quote Indirect quote Italy Italian lira Lira/ Lit /ITL 0.0231 43.2901 Japan Japanese Yen ¥ 0.4001 2.4994 Australia Australian dollar AU$ 27.76 0.0360
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  • 103. Corporate philosophy for Exposure Management Active trading Selective hedging All exposures hedged All exposures left unhedged High reward Low reward High risk Low risk
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  • 118. Bilateral Netting System US Parent German Affiliate US Parent German Affiliate Pay $ 30,000 Pay $ 40,000 Pay $ 10,000 After Bilateral Netting
  • 119.
  • 120. Multinational Netting System X Y Z $ 20 m $ 20 m $ 20 m
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  • 135. Cost of Capital & Capital Structure
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  • 140. Cost of capital for MNCs vs Domestic firms
  • 141. Cost of capital for MNCs vs Domestic firms
  • 142. Cost of capital for MNCs vs Domestic firms
  • 143. Cost of capital for MNCs vs Domestic firms
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