International Exchange Rates

Definition: The price of one country's currency in terms of another country's currency.
Types:
- Fixed exchange rate: Pegged to a specific value or currency basket.
- Floating exchange rate: Determined by market forces.
- Managed float: A combination of fixed and floating exchange rates.
Factors affecting exchange rates:
- Inflation rates
- Interest rates
- Balance of payments
- Government intervention
- Speculation
Exchange rate systems:
- Bretton Woods system (1944-1971): Fixed exchange rates tied to the US dollar.
- European Exchange Rate Mechanism (ERM): Fixed exchange rates among European currencies.

Definition: Investment in a foreign country, either through direct investment or portfolio investment.
Types:
- Direct investment: Establishing a business or acquiring a controlling interest in a foreign company.
- Portfolio investment: Investing in foreign securities, such as stocks and bonds.
Benefits:
- Diversification
- Increased efficiency
- Access to new markets
- Improved competitiveness
Risks:
- Political risk
- Economic risk
- Cultural risk
- Currency risk

Definition: The exchange of goods and services across international borders.
Types:
- Visible trade: Trade in goods, such as manufactured products.
- Invisible trade: Trade in services, such as tourism and financial services.
Theories:
- Absolute advantage: Countries specialize in producing goods in which they have an absolute advantage.
- Comparative advantage: Countries specialize in producing goods in which they have a lower opportunity cost.
Trade barriers:
- Tariffs
- Quotas
- Embargoes
- Non-tariff barriers (e.g. subsidies, regulations)

Definition: Markets that facilitate the exchange of financial assets across international borders.
Types:
- Foreign exchange market (Forex)
- International bond market
- International stock market
- Derivatives market (e.g. options, futures)
Importance:
- Facilitates international trade and investment
- Provides access to capital
- Enhances efficiency and liquidity

Definition: The process of minimizing the risks associated with exchange rate fluctuations.
Types of risk:
- Transaction risk: Risk associated with converting currencies for a specific transaction.
- Translation risk: Risk associated with converting financial statements from one currency to another.
- Economic risk: Risk associated with changes in exchange rates affecting a company's competitiveness.
Techniques:
- Forward contracts
- Futures contracts
- Options contracts
- Swaps
- Hedging
- Diversification

Exchange rate is the price of one country's currency in terms of another country's currency
Three types of exchange rates:
- Fixed exchange rate: Pegged to a specific value or currency basket
- Floating exchange rate: Determined by market forces
- Managed float: A combination of fixed and floating exchange rates
Factors affecting exchange rates:
- Inflation rates
- Interest rates
- Balance of payments
- Government intervention
- Speculation
Two exchange rate systems:
- Bretton Woods system (1944-1971): Fixed exchange rates tied to the US dollar
- European Exchange Rate Mechanism (ERM): Fixed exchange rates among European currencies

Foreign investment is investment in a foreign country, either through direct investment or portfolio investment
Two types of foreign investment:
- Direct investment: Establishing a business or acquiring a controlling interest in a foreign company
- Portfolio investment: Investing in foreign securities, such as stocks and bonds
Benefits of foreign investment:
- Diversification
- Increased efficiency
- Access to new markets
- Improved competitiveness
Risks of foreign investment:
- Political risk
- Economic risk
- Cultural risk
- Currency risk

International trade is the exchange of goods and services across international borders
Two types of international trade:
- Visible trade: Trade in goods, such as manufactured products
- Invisible trade: Trade in services, such as tourism and financial services
Two theories of international trade:
- Absolute advantage: Countries specialize in producing goods in which they have an absolute advantage
- Comparative advantage: Countries specialize in producing goods in which they have a lower opportunity cost
Trade barriers:
- Tariffs
- Quotas
- Embargoes
- Non-tariff barriers (e.g. subsidies, regulations)

Global financial markets facilitate the exchange of financial assets across international borders
Four types of global financial markets:
- Foreign exchange market (Forex)
- International bond market
- International stock market
- Derivatives market (e.g. options, futures)
Importance of global financial markets:
- Facilitates international trade and investment
- Provides access to capital
- Enhances efficiency and liquidity

Currency risk management is the process of minimizing the risks associated with exchange rate fluctuations
Three types of currency risk:
- Transaction risk: Risk associated with converting currencies for a specific transaction
- Translation risk: Risk associated with converting financial statements from one currency to another
- Economic risk: Risk associated with changes in exchange rates affecting a company's competitiveness
Techniques for managing currency risk:
- Forward contracts
- Futures contracts
- Options contracts
- Swaps
- Hedging
- Diversification

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