Exchange rate behavior Material International arbitrage and interest rate parity Relationships among inflation, interest rates

es and exchange rates

Glossary and term definitions Exchange rate The price of a currency expressed in terms of other currencies or gold Arbitrage Simultaneous buying and selling a commodity in different markets to take advantage of price differentials International arbitrage Simultaneous buying and selling a commodity in different markets to take advantage of price differentials internationally Interest rate The periodic charge, expressed as a percentage, for use of credit. Interest parity A theory stating that the difference between interest rates in two countries is the difference between the foreign exchange rate and the spot rate of their two currencies. According to this theory, when one makes two fixed investments in two different currencies, the return on both investments are the same even though interest rates may be different in absolute terms. Inflation The rate at which the general level of prices for goods and services is rising Inflation is the increase in the price of goods and services over a period of time and the resulting loss of purchasing power of Money. Spot rate The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate (spot) settlement (payment and delivery). Forward rate

The forward price (or sometimes forward rate) is the agreed upon price of an asset in a forward contract. Using the rational pricing assumption, we can express the forward price in terms of the spot price and any dividends etc., so that there is no possibility for arbitrage.

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Exchange rate risk management Material Measuring exchange exposure and exchange rate fluctuations Managing transaction exposure

Glossary and term definitions Exchange rate exposure The extent to which the stock-market value of a firm varies with changes in exchange rates, Also called economic exposure Fluctuations Variation: an instance of change; the rate or magnitude of change. refers to the rise and fall in value an investment can experience. Transaction An instance of buying or selling something; a business deal

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Long term asset and liability management Material Direct foreign investment Multinational capital budgeting Country risk analysis

Glossary and term definitions Asset Any possessions that has value in an exchange Liability an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. Capital 3wealth in the form of money or property owned by a person or business and human resources of economic value Budget A budget (from old French bougette, purse) is generally a list of all planned expenses and revenues(incomes). Equations

Considerations: Measure the risk generated by the volatility of the exchange rates Use the appropriate hedging technique to reduce the companys exposure from the exchange rate risk Identify the relevant international variables that affect the international financial decisions whether an investment decision or financial decision To convert currencies and calculate the cross rate for any one currency against other currencies using the different quoting systems Identify the different international sources of funds and the nature of the instruments available in the international capital and money markets Asses the correlation among the global financial market and their impact n the international diversification of the companys portfolio

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