Finance and International Business Flashcards
What are the main functions of the foreign exchange market on international business?
The main functions of the foreign exchange market on international business are:
- Enabling international trade
- Determining relative values of different currencies (rate)
- Provide insurance against forex risk (hedging)
Briefly discuss the main determinants of and impacts on foreign exchange rate
Main determinants of and impact on foreign exchange rate:
- The law of one price
- Purchasing power parity
- Interest rate
- Economic performance
- Political stability
What is forward exchange? What is currency swap? Is there any advantages of swap over forward – explain with an example.
Forward exchange occurs when two parties agree to exchange currency and execute the deal at a specific date in the future.
Currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.
Yes there are advantages of swap if the currency appreciates, then it will be cheaper to pay an international supplier as the company has to buy less currency, which will secure a profit.
In your opinion, is it always good to insure against foreign exchange uncertainty? Why?
It is good to cover risks and creating security but the disadvantage of it is the premium that a company has to pay. Furthermore, it can be good for small companies with little diversification of currency and products. Ultimately, it can be both good and bad depending on the specific company.
