Hedging Currency Risks
Autor: biquette • May 11, 2015 • Coursework • 532 Words (3 Pages) • 896 Views
CW1
HIGH CURRENCY = WEAK
- Increase interest rate when risk of inflation: economy is high so we need to calm the
- Economy weak, interest rate low, increase liquidity
DEFINITIONS | |
SPOT transaction | Requires immediate delivery of foreign exchange |
FORWARD | Requires delivery of foreign exchange in future date |
SWAP | Simultaneous exchange of one foreign currency for another |
TYPES OF FOREING EXCHANGES FINANCIAL INSTRUMENTS |
Forms of currency quotation used by currency dealers
Financial institutions
Agents conducting exchange transactions
Changing currencies values
- Differential between currencies:
Long: positive 1.15 dollar for 1 euro. 1.2$=1€ →€ is gaining value. BUYER
Short: negative: debt: 1.15€=1$ SELLER (expect to sell it and buy it again at lower price)
[pic 1]
If I borrow 1000$ I owe 869€
HEDGING: To be covered against a risk in a changing environment.
FOREX:
BID (prix de vente) | Le cours le plus bas est le prix auquel vous pouvez vendre. C’est le BID c'est-à-dire la meilleure offre disponible pour les clients PRIX PROPOSE/OFFER |
ASK | (Prix d’ac hat=offered by the market): Le cours le plus haut est le prix auquel vous pouvez acheter. C’est le ASK, c'est-à-dire la meilleure demande disponible pour le vendeur. PRIX DEMANDE/DEMEND |
SPREAD | Difference between ask and bid (ask-bid=spread) |
BROKER | Intermediary: transfer money from seller to buyer |
MARKET MARKER | Knows the market and has the capability to buy and sell themselves on the market. They make the market. Oligopoly: If they are alone they have a monopoly and fix the price. |
VOLATILITY | Price variation |
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