Samenvatting
Summary International Financial Management (ECB3IFMIB)
Weekly summary and lecture notes of international financial management ECB3IFMIB Utrecht University
[Meer zien]Voorbeeld 3 van de 23 pagina's
Voorbeeld 3 van de 23 pagina's
In winkelwagengesponsord bericht van onze partner
Verkoper
Volgen
Voorbeeld van de inhoud
Lecture Week 1 – 08/02/2021Spot Exchange Rate – price at which you exchange two currencies now.
Exchange rates are expressed as fractions: S0 = 0.9 $/€ à pay $1 for €0.9 or vice-versa
2 typical sources of confusion:
1. Are you buying or selling?
2. Real world uses different notation à not a fraction.
𝑞𝑢𝑜𝑡𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦
𝑏𝑎𝑠𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦
- Quote currency said to have direct quote
- Base currency said to have indirect quote
USD/EUR à not a fraction
- Means USD is base and EUR is quote
- In our case this means €/$
- We will not use the USD/EUR notation in this course as to avoid confusion
American and European Quotes:
- American terms à USD is quote currency
- European terms à USD is base currency
Cross-currency rate: synthetic exchange rate obtained by combining 2 quoted exchange rates.
X = $/€ x Y/$ = Y/€
Arbitrage: arbitrage activity keeps synthetic and quoted rates close.
Bid-Ask Spread: market makers revenue comes from the bid-ask spread.
- If you were to keep buying and selling the same currency you would make a loss à
market makers profit.
Bid: €1 buys me $1.213 Ask: Need to sell $1.214 for €1
Anti-confusion tips:
1. Dealer needs to make a profit à correct exchange rate to use is always the one least
convenient for you.
2. Bid quote is the smaller one.
,Bid-Ask spread and Cross-Currency rates:
- Ask yourself 2 things:
- 1. How many GBP can I buy using EUR (bid-rate)
- 2. How many EUR can I buy using GBP (ask-rate)
Forward Rate: set exchange rate at t1 for a txn occurring at t2
Ft1, t2 à t1 is when F is decided, t2 is when transaction takes place.
- Most actions occur at short maturities.
Long or short a forward:
- Long EUR forward à buy € at forward rate.
- Short EUR forward à sell € at forward rate.
Eurocurrencies: has nothing to do with €
- An example: sizable amount of USD accumulated outside of the US.
Eurocurrency market: money market for borrowing and lending currencies that are held in the
form of deposits in banks located outside the country where the currency is issued as legal
tender.
, Lecture Week 2 – 15/02/2021
International Parity Conditions
The law of one price: if 2 financial instruments pay the same cash flows:
1. In the same moments in time
2. In the same states of nature
à they must have the same price; otherwise there is arbitrage opportunity.
- We can use the no arbitrage opportunity condition to price financial instruments
and/or form expectations about price movements.
Stochastic arbitrage: (speculation) à still exposed to risk. No speculation condition may hold
only on average.
Covered interest rate parity: used to be the closest thing in finance to a law of nature.
𝐹 €/$ 1 + 𝑖€
=
𝑆 €/$ 1 + 𝑖$
- Can be used to compute the fair forward price à no arbitrage opportunity
€ 1 + 𝑖€
𝐹 7$ = . 𝑆 €/$
1 + 𝑖$
- At this forward price, you don’t pay for entering long or short.
- Covered interest rate parity should always hold as a result of arbitrage activity.
Example of arbitrage strategy:
- Invest €1 in Europe à 1 x (1 + 0.015) = €1.015
- Convert €1 to $ à 1 x (1/0.9) x (1 + 0.035) x 0.92 = €1.058
- à clearly the CIRP is not holding as the two approaches differ.
FX hedging synthetic rate = the 5.8% interest rate that we “created” à the resulting demand
of this interest rate results in the elimination of the arbitrage opportunity.
Some definitions:
# €%$ & '! €%$
- Forward premium: 𝐹𝑃 =
'! €%$
o FP > 0 = euro trades at forward premium over the dollar
o FP < 0 = euro trades at a forward discount over the dollar
- Covered interest rate parity is approximated as: i€ - i$
Voordelen van het kopen van samenvattingen bij Stuvia op een rij:
Verzekerd van kwaliteit door reviews
Stuvia-klanten hebben meer dan 700.000 samenvattingen beoordeeld. Zo weet je zeker dat je de beste documenten koopt!
Snel en makkelijk kopen
Je betaalt supersnel en eenmalig met iDeal, creditcard of Stuvia-tegoed voor de samenvatting. Zonder lidmaatschap.
Focus op de essentie
Samenvattingen worden geschreven voor en door anderen. Daarom zijn de samenvattingen altijd betrouwbaar en actueel. Zo kom je snel tot de kern!
Veelgestelde vragen
Wat krijg ik als ik dit document koop?
Je krijgt een PDF, die direct beschikbaar is na je aankoop. Het gekochte document is altijd, overal en oneindig toegankelijk via je profiel.
Tevredenheidsgarantie: hoe werkt dat?
Onze tevredenheidsgarantie zorgt ervoor dat je altijd een studiedocument vindt dat goed bij je past. Je vult een formulier in en onze klantenservice regelt de rest.
Van wie koop ik deze samenvatting?
Stuvia is een marktplaats, je koop dit document dus niet van ons, maar van verkoper jsstudent. Stuvia faciliteert de betaling aan de verkoper.
Zit ik meteen vast aan een abonnement?
Nee, je koopt alleen deze samenvatting voor €5,99. Je zit daarna nergens aan vast.
Is Stuvia te vertrouwen?
4,6 sterren op Google & Trustpilot (+1000 reviews)
Afgelopen 30 dagen zijn er 67474 samenvattingen verkocht
Opgericht in 2010, al 14 jaar dé plek om samenvattingen te kopen