Ask-Bid/Ask → bid rate on USD/JPY is .oo41 and the ask rate is .0043 → .0043.0041/.0043=4.65%.|USD/JPY is how much JPY is needed to purchase $1|if USD/AUS=.73 today and
yesterday it was .69 the AUS appreciated|The country with the higher interest rate
appreciates|Forward rate F-S/S→if negative it’s a discount ex.british pound forward rate and spot rate
$1.60-$1.63/$1.63=-.018 or -1.8%|future contracts are a commitment|ARBITRAGE→covered interest
(interest arbitrage is process if capitalizing differences between interest rates between two countries)
covered is hedging the position against interest rate risk→The threat of locational arbitrage ensures that
quoted exchange rates are similar across banks in different locations.The threat of triangular arbitrage
ensures that cross exchange rates are properly set. The threat of covered interest arbitrage ensures that
forward exchange rates are properly set. Any discrepancy will trigger arbitrage, which should eliminate
the discrepancy|PPP→
rate=represents the
Fisher effect→real interest
return on investment to savers after
accounting for expected
inflation. |Forward or Future Hedge
on payables allow MNCs
to lock in specific exchange rate. Call
option provides the right
to buy a specified amount of
particular exchange rate
currency at a specified strike price or
exercise price.
RECIEVABLES instead of buying it is
selling but the same concepts still apply. Put (opposite of call) option is the right to sell at specified price.
|Cross rate→ | Indirect
quote→euro/usd 1/direct quote
(indirect quote is foreign currency to
USD) direct quote→usd/euro