INTERNATIONAL FINANCE 1 Derivatives-financial instruments whose values change in response to changes in underlying variables.includes futures,swaps options.

Uses of derivatives Hedgers Speculators arbitrageurs. Types of derivatives over the counter exchange traded derivatives derivatives contract types forward-buy of sell asset at specified future dates futures options-right to buy or sell swapping-agreement to exchange cash flows controversial of derivatives loss due to use of leverages counter party risks eg swaps large risk for inexperienced investor advantages of derivatives facilitates selling and buying of risk 2 foreign exchange market efficiency-exchange rates reflects the information available to market participants (hedgers,speculators and arbitrageurs) excess return should not exceed the cost of acting on that information market efficiency hypothesis information available is reflected in the price so that no investor will gain excess return above normal(equilibrium) return. Value of efficiency market 1. encourage ppl to buy share 2. correct signals for managers-want to maximize shareholders wealth 3. better allocation of resources-for ppl to invest elsewhere levels of market efficiency

1. weak form-share prices reflect all info from past price movements.it is difficult to predict future price movements from past using technical analysis because future is uncertain 2. semi strong form-share prices reflects all available public information a. technical analysis is no use bcoz share prices has already absorved all info b. fundamental analysis can adjust share prices by analysing eco growth,pronouncements,tax rates,dividends, personnels and industry conditions and technological changes. Argument for and against semi strong market efficiency announcement-reflect share price stock split-reflect share prices but shows indication of growth manipulation of earnings-creative accounting 3. strong form-all relevant info including that which is privately held is known and reflected in the share price.even insiders cannot make abnormal profits. Misconception about efficiency market hypothesis any portfolio will perform better than trading rules. But eliminating unsystematic risks and then adjust systematic risk will do better there will be few shares prices movements.but share prices changes bcoz new info is coming every hour only few investors are active.but it needs only few investors 3 Types of risks systematic risk which is common to all assets in the market. Unsystematic risks. unique to particular asset which cannot affect the whole market. Beta-a measure of market risk. An asset beta is a measure of riskness of that asset to the risk of the market as a whole Formula= cov(m,s) Var(m) 4 Foreign exchange is a market where currencies are traded. The most liquid market in the world

Participants in the foreign exchange markets Banks Central banks Brokers Investment funds Multinational companies Factors affecting value of the currency in the market Government budget deficit or surplus-deficit weakens domestic currency Inflation rates and trends GDP and eco health Political factors Financial instruments Spot Forward Futures Swaps Options Structure of foreign exchange market The largest market A 24 hrs mkt OTC mkt(spot,forward,swaps and option) within exchange traded segment and regulated(futures and options) Connected to international network of dealers Mostly traded currency is dollar Functions of foreign exchange markets Facilitate international trade Transfer purchasing power Financing inventories in transit Hedging facilities Interest rate option-a right without obligation to deposit(put) or to borrow(call) fund at agreed interest rate at agreed period