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1
16 Foreign Exchange Derivatives Market
Chapter Objectives
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2
Foreign Exchange Markets
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Exhibit 16.1 Institutional Use of Foreign Exchange
Markets
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Foreign Exchange Markets
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Foreign Exchange Markets
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Foreign Exchange Markets
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Factors Affecting Exchange Rates
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Factors Affecting Exchange Rates
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Factors Affecting Exchange Rates
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Factors Affecting Exchange Rates
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroomuse.
Factors Affecting Exchange Rates
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Forecasting Exchange Rates
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Forecasting Exchange Rates
Technical Forecasting
■ Involves the use of historical exchange rate data
to predict future values.
■ A computer program can be developed to detect
particular historical trends.
■ There are also several time-series models that
examine moving averages and thus allow a
forecaster to identify patterns, such as currency
tending to decline in value after a rise in moving
average over three consecutive periods.
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Forecasting Exchange Rates
Fundamental Forecasting
■ Based on fundamental relationships between
economic variables and exchange rates.
■ Given current values of these variables along
with their historical impact on a currency’s value,
corporations can develop exchange rate
projections.
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Forecasting Exchange Rates
FR S 360
p
S n
Where:
p = Forward Rate Premium
FR = Forward Rate
S = Spot Rate
n = number of days forward rate
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Foreign Exchange Derivatives
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Foreign Exchange Derivatives
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroomuse.
Foreign Exchange Derivatives
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Foreign Exchange Derivatives
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Foreign Exchange Derivatives
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Foreign Exchange Derivatives
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Exhibit 16.2 Estimating Speculative Gains from
Options Using a Probability Distribution
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International Arbitrage
Locational Arbitrage
■ The act of capitalizing on a discrepancy between
the spot exchange rate at two different locations
by purchasing the currency where it is priced low
and selling it where it is priced high.
Triangular Arbitrage
■ Involves buying or selling the currency that is
subject to a mispriced cross-exchange rate.
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Exhibit 16.3 Bank Quotes Used for Locational
Arbitrage Example
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International Arbitrage
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SUMMARY
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SUMMARY (Cont.)
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SUMMARY (Cont.)