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Ch. 10 - the Foreign Exchange Market
Terms in this set (10)
Why is the foreign exchange market important?
1) it's used to convert the currency of one country into the currency of another
2) it provides some insurance against foreign exchange risk
3) events in the foreign exchange market affect firm sales, profits, and strategy
Foreign exchange risk
the adverse consequences of unpredictable changes in exchange rates
the rate at which one currency is converted into another
When Do Firms Use The Foreign Exchange Market?
1) the payments they receive for exports, the income they receive from foreign investments, or the income they receive from licensing agreements with foreign firms are in foreign currencies
2) they must pay a foreign company for its products or services in its country's currency
3) they have spare cash that they wish to invest for short terms in money markets
4) they are involved in currency speculation
the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates
How can firms hedge against foreign exchange risk?
1) the foreign exchange market provides insurance
when a firm insures itself against foreign exchange risk
Spot exchange rate
the rate at which a foreign exchange dealer converts one currency into another currency on a particular day
How do spot rates change?
They change continually depending on the supply & demand for that currency & other currencies
What's the difference between spot rates and forward rates?
Spot exchange rates can be quoted as the amount of foreign currency one U.S. dollar can buy, or as the value of a dollar for one unit of foreign currency
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