INTERNATIONAL FINANCE

1. TYPES OF TRANSACTION

1.1. spot trade

1.1.1. exchange currency immediately

1.2. forward trade

1.2.1. agreement to exchange currency at some future date and some specified price (also called a forward contract)

2. FACTORS INFLUENCING EXCHANGE RATES

2.1. 1. Differential in inflation 2. Differentials in interest rates 3. Current Account Deficits 4. Public Debt 5. Terms of Trade 6. Political Stability and Economic Performance

3. TYPES OF EXCHANGE RISK

3.1. currency risk

3.1.1. Risk from day-to-day fluctuations in exchange rates and the fact that companies have contracts to buy and sell goods in the short run at fixed prices

3.2. Business Risk

3.2.1. Long-run fluctuations come from unanticipated changes in relative economic conditions

3.3. Translation Risk

3.3.1. Income from foreign operations must be translated back to U.S. dollars for accounting purposes, even if foreign currency is not actually converted back to dollars.

4. RELATIVE PURCHASING POWER PARITY

4.1. Provides information about what causes changes in exchange rates over time

5. DEFINITION

5.1. Is an international market in national currencies

6. FOREX

6.1. Is an international market in national currencies

7. EXCHANGE RATE & EXCHANGE QUOTATION

7.1. The price of one country’s currency in terms of another country’s currency

8. CROSS RATES & TRIANGLE ARBITRAGE

8.1. using the U.S Dollar as the common denominator in quoting exchange rates greatly reduces the number of possible cross-currency quotes

9. ABSOLUTE PURCHASING PARITY

9.1. Price of an item is the same regardless of the currency used to purchase (law of one price)

10. INTEREST RATE PARITY

10.1. There relationship between spot exchange rates, forward exchange rates and relative interest rates