5. CHAPTER SUMMARY
What’s Exchange Rates?
- The number of units of a given
currency that can be purchase for one
unit of another currency.
21 125 VND/USD
8. - Hedging in Financial Markets
- Spot and Forward Market Hedge
- Swap
- Other hedging techniques
2. Shifting the risk to the other party
- Invoicing in One’s Own Currency
- Invoicing in Foreign Currency
9.
10. 1. Differentiate between spot and forward exchange
rate. How can a U.S. import firm use the forward
market to protect itself from the adverse effect of
exchange rate fluctuations?
The U.S. import firm can purchase its future payment in
U.K. pounds at the percent spot rate and leave it until
payment is due.
Spot rate
- The exchange rate
between two currencies
for their immediate trade
for delivery within two
business days.
Forward rate
- The cost today for a
commitment to buy or sell
an agreed amount of a
currency at a fixed, future
date.
11. 2. What does it mean when a currency is
trading at a discount to the U.S. dollar in the
spot market?
If the forward rate is below the present spot
rate (in relation to the dollar), the foreign
currency is said to be at a forward discount.
12. 3. Why do export-import firms enter the
foreign exchange market?
To reduce exchange risks involving payments
or receipts in foreign currency.
Payment for export-import activity in the
future.
13. 4. Hedging is not always the most appropriate
technique to limit foreign exchange risks. Discuss.
In view of fees associated with hedging, export-import
firms should consider using this technique when a high
proportion of their cash flow is vulnerable to exchange
rate fluctuations.
14. 5. If a Canadian exporter accepts payments in foreign
currency from buyers in the United States, which
party bears the currency fluctuation risk? Explain.
If the value of the Canadian dollar appreciates in terms of the
U.S. dollar, the Canadian exporter's receipts in local currency
will be reduced, and the Canadian exporter's will bear the
currency fluctuation risk.
The U.S. importer's will bear the currency fluctuation
risk.
15. Eliminates exchange rate volatility as
well as the need to exchange
currencies among EU–area members
6. The euro has now replaced twelve national
currencies. What are the implication of this
development to companies exporting to the
European Union?
16. The U.S. importer can hedge by buying 30,000
U.K. pounds today at the spot rate ($2.00 per
pound).
It will deposit the pounds in the bank until the
payment date in six months and earn interest.
7. Suppose that the spot rate of the U.K. pound today is
$2.00 while the six-month forward rate is $2.05. How
can a U.S. importer who has to pay 30,000 U.K. pounds
in six months hedge his or her foreign exchange risk?
17. 8. In reference to
question 7, what happens
if the U.S. importer does
not hedge and the spot
rate of the pound goes
up to $2.10?
If the importer does
not hedge, he or she
has to pay more
than if he had
hedged.
18. 9. Suppose the spot rate of the yen today is $0.0084 while
the three month forward rate is $0.0076.
(1) How can a U.S.
exporter who is to
receive 350,000 yen in
three months hedge
his/her foreign
exchange risk?
(2) What happens if
the exporter does not
hedge and the spot
rate of the yen in three
months is $0.0078?
The U.S. exporter can hedge by
selling 350,000 yen today for
delivery in three months at
today’s three month forward
rate. After three months, the
exporter receives $2,660 for
350,000 yen, regardless of the
spot rate of the yen.
If the U.S. exporter does not
hedge, he or she gets $2,730 or
$70 more than if he or she had
hedged.
19. 10. Do you think the U.S. dollar will continue to
maintain its key currency status? Explain.
• Strong U.S. economic growth, large
and open credit market, diversified
financial institutions, and independent
central bank.
• The U.S. dollar is very popular in worldwide. Thus, if you
want another currency replace the U.S dollar, it is very
difficult. Because, when you mention the dollar, most
people of the world think about the U.S. dollar.
20. - Global economy has depended
on the US
- Many countries consume limited
imports and often depend on
export to U.S market.
21. - Other developed and rich
developing nations will have to :
Boost private consumption
Move the world away
from excessive
dependence on the US
market
Addressing structural
impediments to import
demand.
22. Countries exchange their exports for dollars
invested in US treasuries to shore up the
value of their dometis currencies
This makes US assets expensive for
foreign investors
This keeps US inflation low ( low
price of imports)
The United States has maintained a strong dollar
police because :
23. Dollar will countinue to maintain its key currency status
The United States Japan and Europe
Economic Growth has been and
will remain
significantly stronge
Growth has been and
will remain
significantly, but not as
stronge as US
Financial institutions States has a large, open
credit market,
diversified financial
institutions, and an
independent central
bank
Japanese and European
financial institutions
lack the breadth and
depth of their US
counterparts. Many are
beginning to recover
after scandals
Incentives for
investments ( rates of
return, yields)
High Lower than US
24. 1. Why does the US government maintain a strong dollar policy?
CASE 10.1.
Keeping U.S inflation
low
Making U.S assets
expensive for foreign
investorsExample
25. 2. Do you think the euro will replace the U.S. dollar as
a key global currency in the coming decade?
26. USD will
continue to
maintain its
key currency
status.
U.S economic
growth has been
and will remains
significantly
stronger than
Japan and other
major euro-zone
countries.
Japanese and
European
financial
institutions lack
the breadth and
depth of their
U.S counter-
parts.
Incentives for
investments in
the United States
are higher than
in Japan and
Europe
The United
States has a large,
open credit
market,
diversified
financial
institutions and
an independent
central bank
Inflation has
been tamed due
to low cost
imports
