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BSc Business Management > 5014 - Finance of International Trade - Forwards p117 - 162 > Flashcards

5014 - Finance of International Trade - Forwards p117 - 162 Flashcards

1
Q

Spot Rates

A

Todays Exchange Rates

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2
Q

Forward Rates

A

Future Rates of exchange agreed today

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3
Q

Indirect Quote

A

Foreign Currency units per unit of domestic currency

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4
Q

Direct Quote

A

Domestic Currency units per unit of foreign currency

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5
Q

Forward Exchange Contract Definition

A

An immediately firm and binding contract between a bank and its customer for the purchase or sale of a specified quantity of a currency at a rate of exchange fixed at the time of the contract being made with delivery of payment of the stated currency on or between two specific dates in the future

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6
Q

Forward Exchange Contract Main Points

A
  • Immediately firm and binding contract
  • Rate of exchange fixed at time of contract creation
  • Exchange takes places on or between 2 specified dates
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7
Q

Risks associated with taking out a Forward Exchange Contract

A
  • Liquidity Risk/Cashflow - Waiting for payment
  • Default Risk
  • Exchange Rate Risk i.e not certain what future exchange rate will be
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8
Q

4 Aspects to Consider in risk management

A

Risk - What is the risk

Probability - how likely will it happen

Impact - How will it effect the business

Action - What can be done to manage the risk

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9
Q

Example: A forward contract worth $150,000 is available today at $1.21:£1 with a term of 3 months, what does this mean?

A

It means in 3 months time the bank will buy the $150,000 off you at a rate of $1.21:£1, this is an obligation and not an option, if the value of the dollar to the pound decrease you are at a GAIN, if its value increases you are a LOSS

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10
Q

In an Exchange Contract the value of a foreign currency DECREASES compared to the domestic, this means….

A

You get less domestic currency for your foreign currency, so you LOOSE money

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11
Q

In an Exchange Contract the value of the foreign currency DECREASES compared to the domestic, this means….

A

The get more domestic currency for your foreign currency, so you GAIN money

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12
Q

Benefits of a Forward Exchange Contract

A
  • Certainty
    • The customer knows what price they will pay, no more or less so can be budgeted and built into cashflow
  • Can be executed on, or between two specific dates in the future depending on whether Fixed Forward or Option Forward (more later)
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13
Q

Fixed Forward Contracts

A

Calling for settlement on a specific date in the future

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14
Q

Options Forward Contracts

A

Calling for settlement between two dates in the future. The option is when to complete the contract

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15
Q

Limitations of Forward Exchange Contracts

A
  • As the contract is firm and binding it must be completed

- They may not be available for every currency

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16
Q

Forwards are quoted in either….

A

Premium or Discount

17
Q

Premiums

A

A premium is when a currency is expensive to buy forward and you receive less of the currency in the future

When you buy forward and get less than you would compared to the spot rate at the time

When your rate is unfavourable

18
Q

Discounts

A

Opposite of a premium, a currency is cheaper to buy going forward and you receive more of the currency in the future

When you buy forwards you get more than the spot rate at the time

19
Q

Premium Simplified Definition

A

A premium is when you receive LESS Forward

20
Q

Discount Simplified Definition

A

A discount is when you receive MORE Forward

21
Q

Exporter Example: Selling to USA for $, Selling $ for £, Forward Rate Lower

A
  • Will sell $ to bank for £
  • Forward Rate is LOWER than spot
  • So, for every $/£ you pay less $ compared to the £
  • Therefore they gain relative to spot
22
Q

Importer Example: Buying From USA in $, Buying $ for £, Forward Rate Lower

A
  • Will Buy $ off bank for £
  • Forward rate is LOWER than spot
  • So, for $/£ you PAY less $ compared to £
  • Therefore they loose relative to spot
23
Q

Exporter Example: Selling to USA in $, Selling $ for £, Forward Rate Higher

A
  • Will Sell $ to bank for £
  • Forward Rate is HIGHER than spot
  • So, for every $/£ you GIVE more $ compared to £
  • Therefore you LOOSE relative to spot
24
Q

Importer Example: Buying from USA in $, Buying $ for £, Forward Rate Higher

A
  • Will Buy $ from bank for £
  • Forward Rate is HIGHER than spot
    So, for every $ you receive more £ relative to spot
25
Q

Forward Margins

A

Reflection of the interest differentials between two countries

BSc Business Management (37 decks)

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