Term
| What would shift demand curve for foreign currency to the right? |
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Definition
Higher inflation in domestic currency
Lower interest rates in domestic currency
Domestic government purchases foreign currency |
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Term
| What would shift the supply curve for foreign currency to the right? |
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Definition
Higher inflation rate in foreign currency
Lower interest rates in foreign currency
Foreign government selling local currency |
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Term
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Definition
Forward quoted in points. One point is equal to .01%.
Premium = [ (n-day forward rate - spot) / spot] x [360/n] |
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Term
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Definition
The spot rate for the currency of a country with a higher inflation than its trading partner will depreciate in the long run.
Higher inflation = weakening currency
Lower inflation = strengthening currency |
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Term
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Definition
Higher inflation causes a higher nominal rate.
Nominal rate = real rate + inflation
and
the real rate is constant
Nominal rates differ from country to country because of differences in inflation rates |
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Term
| International Fisher Effect |
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Definition
Long run
The spot rate for a currency with higher interest rates will depreciate against a currency with lower interest rates in the long run.
but
Short run
The spot rate for the currency with higher interest rates will appreciate in the short run. |
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Term
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Definition
| The forward rate for a currency with higher interest rates will fall, resulting in a forward discount. |
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Term
| What are the three types of FX exposure? |
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Definition
Transaction
Translation / Accounting
Operating / Economic |
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Term
| What is the exposure of an open A/R denominated in foreign currency? |
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Definition
If foreign currency weakens, the A/R falls in local currency value.
If foreign currency strengthens, the A/R rises.
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Term
If a UK firm sells goods to Belgian buyer for €2.0M and the current exchange rate is €1.5 / £, what happens if:
exchange rate goes to €1.6 / £
exchange rates goes to €1.4 / £ |
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Definition
€1.6 / £
The Euro has weakened, i.e., it takes more Euros to buy one pound.
value of the A/R drops from £1.33 to £1.25
€1.4 / £
The Euro was stengthened
value of the A/R rises from £1.33 to £1.43 |
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Term
| What type of option (call or put) do you purchase to hedge against open A/R position? |
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Definition
| Buy a put option on the foreign currency. It will allow you to sell the foreign currency at the time in the future when the A/R is paid. |
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Term
| How would you use a money market hedge for an open A/R position? |
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Definition
Now
Borrow the foreign currency (PV based on foreign borrowing rates that would equal FV equal to receivable)
Exchange FX for local dollars
Future
Receive foreign currency from A/R payment
Repay foreign currency loan |
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Term
| How would you use a money market hedge for an open A/P position? |
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Definition
Today
Borrow local currency (PV of future payable amount using borrowing rates as discount factor)
Exchange home currency at spot
Invest foreign currency
Future
Use investment to cover foreign payable
Repay home currency loan |
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