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Chapter 3
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to take advantage of favorable economic conditions; when they expect foreign currencies to appreciate against their own; and to reap the benefits of international diversification.
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to capitalize on higher foreign interest rates; when they expect foreign currencies to appreciate against their own; and to reap the benefits of diversification. to capitalize on lower foreign interest rates; and when they expect foreign currencies to depreciate against their own.
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Measuring Foreign Exchange Market Activity: Average Electronic Conversions Per Hour
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Currency Derivatives
1. Forward Contracts: agreements between a foreign exchange dealer and an MNC that specifies the currencies to be exchanged, the exchange rate, and the date at which the transaction will occur.
The forward rate is the exchange rate specified by the forward contract. The forward market is the over-the-counter market where forward contracts are traded.
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Currency Derivatives
2. Futures Contracts: similar to forward contracts but sold on an exchange
Specifies a standard volume of a particular currency to be exchanged on a specific settlement date. The futures rate is the exchange rate at which one can purchase or sell a specified currency on the specified settlement date. The future spot rate is the spot rate that will exist at a future point in time and is uncertain as of today.
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Currency Derivatives
3. Currency Options Contracts
a.
Currency Call Option: provides the right to buy currency at a specified strike price within a specified period of time. Currency Put Option: provides the right to sell currency at specified strike price within a specified period of time.
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b.
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of the country where they are placed but issued by foreign borrowers.
Eurobonds: Bonds sold in countries other than the
country of the currency in which the bonds denominated. The emergence of the Eurobond market was partly due to the 1963 U.S. Interest Equalization Tax (IET). They have become very popular, perhaps in part because they circumvent registration requirements.
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Direct foreign investment, or the acquisition of foreign real assets. Short-term investment or financing in foreign securities. Longer-term financing in the international bond or stock markets.
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Questions to Answer
Why do international financial markets
exist?
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