Currency risk Flashcards
Direct exchange rate
Indirect exchange rate
How much does $1 cost in £
How many $ can I buy with £1
5 key parties in FX
- Retail clients
- international banks top5 are 50% of global trans
- nonbank dealers
- FX brokers
- central banks
Broker dealers
Brokers - find deal for fee
Dealer - trade on own behalf, profit on spread
Bid, Offer, Spread
Bid is what you buy at, offer is what you sell at // profit is difference
1 pip
0.0001
1/100 of 1%
GBPUSD tells you
GBP base currency, 1 of this gets you GBPUSD
Why FX is important
Value of MNC is PV of Future CFs
CFs impacted by FX movements
DR impacted by D in risk perception
Valuation of foreign assets and liability changes due to FX changes
4 impactors on international trade
Inflation
National income
Govt policy
FX rates
Transaction risk
Risk real CFs different than expected
Cash paid or received could be higher or lower due to FX movement
3 theories of FX
PPP
Interest Rate Parity
International Fisher Effect
PPP
Relative inflation rate, predit percentage change in spot rate based on inflation
Interest rate parity
Based on relative interest rates, forward rate premium
International Fisher Effect
Based on relative interest rates, predict % change in spot rate
What influences FX rates 5 things
Relative inflation rates Relative interest rates Relative income levels Govt controls Expectations
Spot rate
Quote 2 currencies immediate delivery / 2 day until delivery/settlement
