Professional Documents
Culture Documents
Foreign Exchange
Chapter Objectives:
Chapter Four
INTERNATIONAL
FINANCIAL
MANAGEMENT
Chapter Outline
McGraw-Hill/Irwin
4-1
Chapter Outline
FX Market Participants
Correspondent Banking Relationships
McGraw-Hill/Irwin
4-2
Chapter Outline
McGraw-Hill/Irwin
4-3
Chapter Outline
McGraw-Hill/Irwin
4-4
McGraw-Hill/Irwin
4-5
McGraw-Hill/Irwin
4-6
McGraw-Hill/Irwin
4-7
McGraw-Hill/Irwin
4-8
Direct quotation
Indirect Quotation
McGraw-Hill/Irwin
4-9
McGraw-Hill/Irwin
4-10
The direct
quote for
British
pound is:
1 = $1.688
McGraw-Hill/Irwin
4-11
The indirect
quote for
British
pound is:
.5924 = $1
McGraw-Hill/Irwin
4-12
Note that
the direct
quote is the
reciprocal of
the indirect
quote:
1.688
1
.5924
McGraw-Hill/Irwin
4-13
Spot FX trading
McGraw-Hill/Irwin
4-14
Cross Rates
i.e. $1 = 2 DM
i.e. DM1 = 50
,
DM
$1
DM 1
$1
S ($ / ) .01 or $1 100
DM 2 50 100
McGraw-Hill/Irwin
4-15
Triangular Arbitrage
Suppose we
observe these
banks posting
these exchange
rates.
$
Barclays
S(/$)=120
Credit Lyonnais
4-16
S(/$)=1.50
Credit Agricole
S(/)=85
Triangular Arbitrage
The implied S(/) cross
rate is S(/) = 80
$
Barclays
S(/$)=120
Credit Lyonnais
1.50 $1
1 S(/$)=1.50
$1
120 80
Credit Agricole
S(/)=85
4-17
Triangular Arbitrage
As easy as 1 2 3:
Barclays
S(/$)=120
Credit Lyonnais
1.50 $1
1 S(/$)=1.50
$1
120 80
Credit Agricole
S(/)=85
McGraw-Hill/Irwin
4-18
Triangular Arbitrage
Sell $100,000 for at S(/$) = 1.50
receive 150,000
Sell our 150,000 for at S(/) = 85
receive 12,750,000
Sell 12,750,000 for $ at S(/$) = 120
receive $106,250
profit per round trip = $ 106,250- $100,000 = $6,250
McGraw-Hill/Irwin
4-19
McGraw-Hill/Irwin
4-20
McGraw-Hill/Irwin
4-21
McGraw-Hill/Irwin
4-22
McGraw-Hill/Irwin
4-23
McGraw-Hill/Irwin
4-24
McGraw-Hill/Irwin
4-25
Clearly the
market
participants
expect that
the yen will
be worth
MORE in
dollars in
six months.
McGraw-Hill/Irwin
4-26
Payoff Profiles
profit
F180($/) = .009524
4-27
Payoff Profiles
profit
short position
F180(/$) = 105
F180(/$) = 105 or
F180($/) = .009524.
-F180(/$)
loss
McGraw-Hill/Irwin
Whether the
payoff profile
slopes up or
down depends
S180(/$) upon whether
you use the direct
or indirect quote:
4-28
Payoff Profiles
profit
short position
S180(/$)
F180(/$) = 105
-F180(/$)
loss
McGraw-Hill/Irwin
Payoff Profiles
profit
short position
15
S180(/$)
F180(/$) = 105
-F180(/$)
loss
McGraw-Hill/Irwin
120
Payoff Profiles
profit
F180(/$)
F180(/$) = 105
-F180(/$)
loss
McGraw-Hill/Irwin
Long position
4-31
Payoff Profiles
profit
-F180(/$)
0
120
F180(/$) = 105
15
Long position
loss
McGraw-Hill/Irwin
4-32
McGraw-Hill/Irwin
4-33
SWAPS
McGraw-Hill/Irwin
4-34
Comparative Advantage
as the Basis for Swaps
Consider two firms A and B: firm A is a U.S.based
multinational and firm B is a U.K.based
multinational.
Both firms wish to finance a project in each others
country of the same size. Their borrowing
opportunities are given in the table below.
$
Company A
8.0%
11.6%
Company B
10.0% 12.0%
McGraw-Hill/Irwin
4-35
Comparative Advantage
as the Basis for Swaps
A is the more credit-worthy of the two firms.
A pays 2% less to borrow in dollars than B and A
pays .4% less to borrow in pounds than B:
$
Company A
8.0%
11.6%
Company B
10.0% 12.0%
4-36
$8%
12%
Company
A
McGraw-Hill/Irwin
$9.4%
Bank
Company
11%
12%
B
$
Company A
8.0%
11.6%
Company B
10.0% 12.0%
4-37
$8%
Company
11%
A
As net position is to
borrow at 11%
McGraw-Hill/Irwin
$9.4%
Bank
12%
Company
B
Company A
8.0%
11.6%
Company B
10.0% 12.0%
4-38
12%
$8%
12%
Company
A
McGraw-Hill/Irwin
$9.4%
Bank
Company
11%
12%
B
$
Company A
8.0%
11.6%
Company B
10.0% 12.0%
4-39
Bs net position is to
borrow at $9.4%
$8%
$9.4%
Bank
12%
Company
A
Company
11%
12%
A saves .6%
McGraw-Hill/Irwin
Company A
8.0%
11.6%
Company B
10.0% 12.0%
4-40
$8%
$9.4%
Bank
12%
Company
A
Company
11%
A saves .6%
McGraw-Hill/Irwin
12%
Company A
8.0%
11.6%
Company B
10.0% 12.0%
4-41
B saves $.6%
Swap
$8%
$8%
$9.4%
Bank
12%
Company
A
Company
11%
A saves .6%
McGraw-Hill/Irwin
12%
Company A
8.0%
11.6%
Company B
10.0% 12.0%
4-42
B saves $.6%
SWAPS
McGraw-Hill/Irwin
4-43
Forward Premium
f180, DMv$
.01375
S ($ / DM )
180
.5235
McGraw-Hill/Irwin
4-44
McGraw-Hill/Irwin
4-45