Podcast
Questions and Answers
What term describes the difference between the buying price and selling price in foreign exchange transactions?
What term describes the difference between the buying price and selling price in foreign exchange transactions?
- Commission
- Markup
- Fee
- Spread (correct)
Market makers sell foreign exchange at the same price they buy it.
Market makers sell foreign exchange at the same price they buy it.
False (B)
What is the buying price for British pounds if a broker is willing to sell them at $1.9077?
What is the buying price for British pounds if a broker is willing to sell them at $1.9077?
$1.9072
Car dealers generate profit from the difference between the buying price of €______ and the selling price of €10,000.
Car dealers generate profit from the difference between the buying price of €______ and the selling price of €10,000.
Match the following entities with their market roles:
Match the following entities with their market roles:
What happens to the demand for US dollars when the price of US goods increases for EU importers?
What happens to the demand for US dollars when the price of US goods increases for EU importers?
The supply of US dollars is influenced by the demand for US goods by EU importers.
The supply of US dollars is influenced by the demand for US goods by EU importers.
What is the yield on one-year Swiss Franc government bonds?
What is the yield on one-year Swiss Franc government bonds?
What is the primary factor that determines the spot rate S(€/$)?
What is the primary factor that determines the spot rate S(€/$)?
When the exchange rate in the market is €1.5/$1, the demand for US dollars by EU importers will _____ due to higher prices of US goods.
When the exchange rate in the market is €1.5/$1, the demand for US dollars by EU importers will _____ due to higher prices of US goods.
The Swiss Franc /USD spot rate was 1.8.
The Swiss Franc /USD spot rate was 1.8.
How much will the arbitrageur have to repay after borrowing CHF10 million at a yield of 4%?
How much will the arbitrageur have to repay after borrowing CHF10 million at a yield of 4%?
Match the following exchange rates with their corresponding effects on the demand for US dollars:
Match the following exchange rates with their corresponding effects on the demand for US dollars:
If the one-year forward market rate is CHF1.75/$, the amount of dollars needed to repay CHF10,400,000 is $______.
If the one-year forward market rate is CHF1.75/$, the amount of dollars needed to repay CHF10,400,000 is $______.
Match the following steps in the arbitrage process with their respective amounts:
Match the following steps in the arbitrage process with their respective amounts:
What is the main aim of the Kyoto Protocol?
What is the main aim of the Kyoto Protocol?
The Paris Agreement imposes legally binding emission reduction targets on all signatory countries.
The Paris Agreement imposes legally binding emission reduction targets on all signatory countries.
What are Nationally Determined Contributions (NDCs) in the context of the Paris Agreement?
What are Nationally Determined Contributions (NDCs) in the context of the Paris Agreement?
The _______ Convention controls the transboundary movements of hazardous wastes.
The _______ Convention controls the transboundary movements of hazardous wastes.
How often must countries report their progress under the Paris Agreement?
How often must countries report their progress under the Paris Agreement?
Match the following agreements with their key focus areas:
Match the following agreements with their key focus areas:
Multinational firms must factor ______ costs into their operations due to carbon pricing mechanisms.
Multinational firms must factor ______ costs into their operations due to carbon pricing mechanisms.
The Paris Agreement encourages countries to lower their greenhouse gas emissions without requiring them to increase energy efficiency.
The Paris Agreement encourages countries to lower their greenhouse gas emissions without requiring them to increase energy efficiency.
According to Relative PPP, what happens to a currency when a country experiences high inflation relative to another country?
According to Relative PPP, what happens to a currency when a country experiences high inflation relative to another country?
The Relative PPP formula indicates that the rate of change in exchange rates is equal to the difference in inflation rates.
The Relative PPP formula indicates that the rate of change in exchange rates is equal to the difference in inflation rates.
What is the expected depreciation of the Turkish Lira if the inflation is 20% for Turkey and 2% for the Euro area?
What is the expected depreciation of the Turkish Lira if the inflation is 20% for Turkey and 2% for the Euro area?
If high inflation is experienced relative to the UK, exports to the UK will eventually ______.
If high inflation is experienced relative to the UK, exports to the UK will eventually ______.
What was the original attribution of the ideas behind PPP?
What was the original attribution of the ideas behind PPP?
Actual exchange rates always conform to the predicted rates from the PPP theory in the short term.
Actual exchange rates always conform to the predicted rates from the PPP theory in the short term.
Match the following inflation rates with their corresponding expected currency behavior for the Turkish Lira against the Euro:
Match the following inflation rates with their corresponding expected currency behavior for the Turkish Lira against the Euro:
What does the Relative PPP state about the exchange rate based on inflation differences?
What does the Relative PPP state about the exchange rate based on inflation differences?
Under what condition can there be an opportunity for covered interest arbitrage?
Under what condition can there be an opportunity for covered interest arbitrage?
A rise in the Home interest rate today will lead to a stronger Home currency today.
A rise in the Home interest rate today will lead to a stronger Home currency today.
What is the formula for the theoretical PPP-based exchange rate?
What is the formula for the theoretical PPP-based exchange rate?
The price of a standard commodity basket in the US is represented as P$ and in the UK as P£. According to PPP, these must be equal when converted using the exchange rate: P$ = S($/£) · P£. This represents the _____ of one price.
The price of a standard commodity basket in the US is represented as P$ and in the UK as P£. According to PPP, these must be equal when converted using the exchange rate: P$ = S($/£) · P£. This represents the _____ of one price.
If the US interest rate is 4% per year and the UK interest rate is 9% per year, which of the following is true?
If the US interest rate is 4% per year and the UK interest rate is 9% per year, which of the following is true?
According to purchasing power parity, the cost of a haircut in the US should be exactly the same as the cost in Hong Kong.
According to purchasing power parity, the cost of a haircut in the US should be exactly the same as the cost in Hong Kong.
What does PPP stand for in economics?
What does PPP stand for in economics?
Flashcards
Spread
Spread
The difference between the buying price and selling price of a currency by a market maker.
Market Maker
Market Maker
A financial intermediary that provides liquidity in the market by actively buying and selling currencies.
Sell Rate
Sell Rate
The price at which a market maker is willing to sell a currency.
Buy Rate
Buy Rate
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Indirect Quote
Indirect Quote
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Demand for a Currency
Demand for a Currency
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Supply of a Currency
Supply of a Currency
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Spot rate
Spot rate
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Dynamic Exchange Rates
Dynamic Exchange Rates
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Exchange rate equilibrium
Exchange rate equilibrium
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Kyoto Protocol
Kyoto Protocol
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Paris Agreement
Paris Agreement
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Basel Convention
Basel Convention
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Nationally Determined Contributions (NDCs)
Nationally Determined Contributions (NDCs)
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Carbon Pricing
Carbon Pricing
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Energy Efficiency and Renewable Energy
Energy Efficiency and Renewable Energy
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Sustainable Supply Chains
Sustainable Supply Chains
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Impact on Multinational Firms
Impact on Multinational Firms
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Covered Interest Arbitrage
Covered Interest Arbitrage
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Covered Interest Arbitrage Condition
Covered Interest Arbitrage Condition
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Purchasing Power Parity (PPP)
Purchasing Power Parity (PPP)
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PPP-Based Exchange Rate
PPP-Based Exchange Rate
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PPP and Exchange Rate Determination
PPP and Exchange Rate Determination
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What is a forward rate?
What is a forward rate?
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What is arbitrage?
What is arbitrage?
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What is interest rate parity (IRP)?
What is interest rate parity (IRP)?
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How does the arbitrageur profit in this scenario?
How does the arbitrageur profit in this scenario?
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What is the arbitrageur's profit?
What is the arbitrageur's profit?
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Relative PPP
Relative PPP
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High Inflation and Currency Depreciation
High Inflation and Currency Depreciation
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Impact of Inflation on Trade
Impact of Inflation on Trade
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PPP in the Short Term
PPP in the Short Term
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Factors Affecting PPP
Factors Affecting PPP
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Long-Term PPP
Long-Term PPP
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Empirical Tests of PPP
Empirical Tests of PPP
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Study Notes
International Finance 2024-2025 Course Objectives
- Help students prepare for increasingly globalized financial and product markets.
Course Topics
- FX Markets
- Direct vs. Indirect Quotations, Spot vs. Forward Quotations
- Bid-ask Spreads
- Demand and Supply Model
- International Monetary Arrangements
- Balance of Payments
- FX Forward Contracts
- Currency Options
- Interest Rate Parity
- Purchasing Power Parity
Reference Textbook
- International Financial Management (8th edition)
- Authors: Eun C., Resnick B., & Tuugi Chuluun
- Publisher: McGraw-Hill
- Available at IESEG's library
Course Organization
- Syllabus available from IESEG-online
- Course Progression:
- Day 1-3: Basic exchange rate markets
- Day 4-6: Exchange rate risk hedging
- Day 7-8: Long-term exchange rate determinants
- Day 9: Presentations
Assessment
- Final unseen exam (35%)
- Three in-class quizzes (45%)
- 45 minutes each
- Tentatively scheduled on class 3, 6, and 9
- Group presentation (20%)
- Work in groups of 3 or 4
- Presentation format: 20-30 minutes in-class presentation on topics provided on MyCourses
- Presentation dates: Starting from session 2
- Topics must be selected by the end of the second session (see MyCourses)
Lecturers
- Hamid Babaei/CENGIZ, Umur/VUONG, Hung-Cuong
Day One/Two/Three Topics
- FX markets
- Quotations
- Balance of Payments (BoP)
Foreign Exchange News
- Swiss franc soars, stocks tank as euro peg scrapped
- Latest threat to the UK's economy is its crumbling currency
- Euro falls to equal the US dollar for the first time in 20 years
MNC Expansion Motivation
- Multinational corporations (MNCs) expand internationally for various reasons:
- Size and growth potential of the market
- Fear of future protectionism
- Desire to compete with and learn from rivals on their home ground
- Lower relative production costs in some countries
- Access to new technology to improve global competitiveness
- Hedging currency risk
International Transactions Motivation
- Ability to access diverse capital sources
- Reduced tax liabilities by diversifying investments across countries
- Diversified investment/product portfolios
- Increased potential for higher, less risky returns than domestic investments
International Monetary System
- Bimetallism (Pre-1875)
- Classical Gold Standard (1875-1914)
- Interwar Period (1915-1944)
- Bretton Woods System (1945-1972)
- Flexible Exchange Rate Regime (1973-Present)
European Monetary System
- Aim to establish a zone of monetary stability in Europe
- Coordinate exchange rate policies with non-EMS currencies
- Pave the way for eventual European monetary union
FOREX Markets Learning Objectives
- Understanding the function and structure of the FOREX Market
- Ability to read market quotations
- Derive cross-rate quotations
- Analysis of the FOREX forward market
- Definition of forward premium
FOREX Market Function and Structure
- Foreign exchange (FOREX) markets enable the conversion of foreign purchasing power
- Trading of options, forward, and futures contracts
- Over-the-counter (OTC) market
- Network of bank currency traders, dealers, and brokers using electronic dealing systems.
FOREX Market Characteristics
- Largest financial market globally
- Open 365 days/year, 24/7
- Major transaction hubs: UK and US
- Structure: Commercial banks, foreign exchange brokers, individuals, MNCs, speculators, institutional investors, and central banks.
- OTC Markets vs. Exchanges
### Spot Market
- Quotations can be direct or indirect
- Direct: How many units of foreign currency are required to purchase one unit of domestic currency
- Indirect: How many units of domestic currency are required to purchase one unit of foreign currency
- Notation: S(j/k) = price of one unit of currency k in terms of currency j
- Example: S(£/$) = 0.5 (indirect) and S($/£) = 2 (direct)
Spot Rate Quotations
- Table of spot rate quotations for various currencies (multiple variations across pages)
- Direct and indirect quotations examples
- Forward rate data (multiple variations across pages)
### Bid-Ask Spread
- Bid price: Highest price a market maker will pay to buy an asset, such as a currency
- Ask price: Lowest price a market maker will sell an asset
- Spread:Difference between bid and ask prices (percentage variations across the pages)
### The FX Bid-Ask Spread
- Market makers earn profits from the difference between the buy and sell prices
### FX Spot Market Analysis
- How market makers conduct buy/sell FX transactions
- Profit from spreads, influencing market activity due to liquidity provision
- Similarities between FX market makers and car dealers
Forward Exchange Rates
- Agreements to buy or sell foreign currency at a specific future date.
### Forward Rate Quotations
- Spot rate and forward rate for various currency pairs.
Currency Options
- Rights, but not obligations, to buy/sell a currency later at a predetermined price.
- European vs. American options
- Options cost; option premium
- Profit/loss profiles (long and short positions)
- Option exercise prices
- Example and computation of option profits and losses
### Future Contracts
- Exchange contracts for the delivery of assets, commodities, or currencies.
- Daily resettlement of gains/losses.
BoP and Exchange Rate
- Balance of Payments (BoP): Record of a country's int'l transactions over a period
- Breakdown of BoP components: -Current Account (BCA): Imports/exports; unilateral transfers -Capital Account (BKA): Investment into and out of the country -Statistical Discrepancy, Official Reserves Account
- Relationship between BoP and exchange rates
- Examples of BoP calculations for the United States and its impact on currency.
### PPP
- Purchasing Power Parity (PPP) suggests that the price of a basket of goods and services should be the same across countries when converted to a common currency.
- Absolute and relative PPP theories
- Evidence for how PPP does and doesn't hold in the real world
- Charts visualizing historical data across various currencies
- Empirical examples of PPP discrepancies among national currencies
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Description
Test your knowledge on key concepts in foreign exchange, including buying and selling prices, market roles of entities, and the impact of demand on currency values. This quiz covers essential topics that are crucial for understanding the dynamics of foreign currency transactions.
