Subido por Saúl Ramírez

International Finance and Risk Management

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Maestro: Jorge Everardo Martínez Morales
jeverardotec.mx
cel: 2226154722
Grading:
60% partial exam
15% mock
15% assignments and activities
10% participation and engagement
Final Note:
25% first-term grade
25% second-term grade
5% assignments for final term
30% cumulative final exam
15% final project
Libro: international Financial Management 10th. Edition
CURRENCY EXCHANGE RATES
Foreign currency markets serve companies and individuals that purchase or sell foreign
goods and services denominated foreign currencies.
Foreign Exchange Markets
 Derivatives markets
o Community markets
 Metals
 Energy and oil
 Raw materials
 Equity market (stock)
 Bonds/ Fixed income markets
 Forex market > Continuous market, it operates 24/7
 Crypto market
 Alternative investments
o Venture capital
o Private market
HEDGING (cobertura) vs. SPECULATIVE PURPOSES
 Risk arise from their cross-border transactions
 When a firm takes a position in the foreign exchange market to reduce an existing
risk, we say the firm is hedging its risk.

Investors, companies and financial institutions, such as banks and investment funds,
all regularly enter into speculative foreign currency transactions.
BUY SIDE vs SELL SIDE
 The primary dealers in currencies and originators of foreign exchange contracts are
multinational banks.
 The buy since consists of the many buyers of foreign currencies. These buyers
include:
Scotiabank > Canada
Citibank > USA
BNP > France
Commerce Bank > Germany
ICBC > China
JP Morgan > USA
HSBC > UK
Barclays > UK
Capital One > USA
Santander > Spain
BBVA > Spain
Buy side:
 Incorporations
o Multinational enterprises (part of the buy side): Engage in cross-border
transactions, purchase and sell foreign currencies as a result.
 Blackrock
 Cemex
 Bimbo
 Samsung
 P&G
 Investment Accounts: Hold foreign currencies and may both speculate and hedge
with currency derivates.
o Private funds
o Retirement and pension funds
 Governments and government entities: Acquire foreign exchange for transactional
needs, investment or speculations.
 Retail Market: It refers to the FX transactions by households and relatively small
institutions and may be for tourism, cross-border investment or speculative trading.
Hard currency
Soft currency
Largely tradeable
Rarely known
Well recognized as a medium of payment Not accepted as widely as the hard
globally.
currencies.
Liquid
Illiquid
CAD
BRL
SEK
HKD
EUR
MXN
USD
GBP
CHF
JPY
AUD
NZD
CNY
RBC etc.
ISO code the way currencies are known.
WHAT IS AN EXHANGE RATE?
Is simply the price of units of one currency in terms of another.
18.6270
MXN
USD
>
domestic currency
foreign curency
(peso x dólar)
In financial databases and webpages, such as Bloomberg to get the currency of the previous
example you need to write it in the other way. Example: USDMXN.
PRICE CURRENCY vs. BASE CURRENCY
In a foreign currency quotation, we have the price of one currency in units of another
currency. These are often referred to as the base currency and the price currency.
domestic currency
price currency
>
foreign currency
base currency
DIRECT QUOTE vs. INDIRECT QUOTE
DQ: Currency quote for a foreign currency per unit terms of a domestic currency.
Because it is the most traded currency in the world.
IQ: the opposite or reciprocal of a direct quote, also known as a “price quotation”,
which expresses the price of a fixed number of units of a foreign currency as compared
SPOT EXCHANGE RATE
The currency exchange rate is for immediately delivery, which for most currencies
means the exchange of currencies takes 2-days after the trade.
PERCENTAGE CHANGE IN A CURRENCY RELATIVE TO ANOTHER CURRENCY
US DOLLAR INDEX
Indicator measured of the value of the USD relative to the value of a basket of six
currencies of the majority of the US´s most significant trading partners.
The six currencies are EUR, CHF, JPY, CAD, GBP and SEK.
EJERCICIOS EN LIBRETA
MID QUOTES
Bloomberg Webpage
BID – ASK (Compra y Venta)
In the middle of this is MID (value of the currency)
- BID: we buy (bank), client sells
- ASK: we sell (bank), client buys
Ask quote will always be higher than the bid quote
CROSS CURRENCY RATE
 The cross rate is the exchange rate between two currencies implied by their exchange
rates with a common third currency.
 Cross rates are necessary when there is no active FX market in the currency pair.
FOREIGN EXCHANGE RATE MATRIX
This matrix displays MID quotes for cross rates for the currencies under analysis, that is, it
shows both direct and indirect quotes.
BLOOMBERG WEBPAGE
PRICE
BASE
CCY = CURRENCY
Spot exchange rate: Is the currency exchange rate for immediately delivery.
FORWARD EXCHANGE RATE
Currency exchange rate for an exchange to be done in the future.
A forward is actually an agreement to exchange a specific amount of one currency for a
specific amount of another on a future date specified in the forward agreement.
FORWARD QUOTES
Exchange rate regime
Is the way a country manages its currency in relation to other currencies and the foreign
exchange market.
An ideal currency regime would have three properties:
1. The exchange rate between any two currencies would be credibly fixed.
2. All currencies would be fully convertible.
This condition ensures unrestricted flow of capital.
3. Each country would be able to undertake fully independent monetary policy in
pursuit of domestic objectives, such as growth and inflation targets.
FLEXIBLE EXCHANGE RATE
The exchange rate is determined by the market forces of supply and demand, and
therefore fluctuates freely in the market.
FIXED EXCHANGE RATE
Is an exchange rate that is set at a determined amount by government policy. Unified
currency regime is the presence of only one central bank with the power to expand and
contract the supply of money.
1. No separate legal tender
In this regime a country does not have its own legal tender.
Dollarization. The country uses another country's currency as its domestic currency.
Monetary union. In this case a group of countries share a common currency, for example
the European Union uses the euro as sole currency.
2. Currency board system
The monetary authority is required to maintain a fixed exchange rate with a foreign
currency. Its foreign currency reserves must be sufficient to ensure that all holders of its
own currency can convert them into the reserve currency.
3. Fixed Parity/ Pegged
The country tries to keep the value of its currency constant against another country, but it
has no legal obligation to do so. This is also known as the pegged exchange rate system.
4. Target zone
This is a fixed parity with fixed horizontal intervention bands that are somewhat wider – up
to +/-2 percent around the parity – than in the simple fixed parity regime.
The wider bands provide the monetary authority with greater scope for discretionary policy.
5. Managed float
A country's exchange rate is adjusted based on the country's internal or external policy
targets –intervening or not to achieve trade balance, price stability, or employment
objectives.
6. Independent float
In this case, the exchange rate is left to market determination and the monetary authority
is able to exercise independent monetary policy aimed at achieving such objectives as price
stability and full employment.
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