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Chapter 12 book notes

 

 

Spot exchange rate:  The current rate of exchange for a given currency.

 

Forward exchange rate: An interest rate negotiated by the bank for some time into the future.

 

direct quote: When currency exchanges are expressed in U.S. dollar equivalents.

 

indirect quote: Currency exchange rate that is shown in a foreign currency relative to the dollar

 

3 types of currency speculation:

1. Futures contract – Commitment to purchase or deliver a specified quantity of a foreign currency on a designated date in the future.

 

2. Options – The holder have the option to buy or sell at a future point in time.  However there is no obligation to actually buy or sell the currency.

 

3. Currency swap – Two entities agree to swap a certain amount of currency at a point in the future.

 

 

 

 

 

 

 

 

Formulas

 

1. [(Forward rate – Spot rate) / Spot rate] * (360/N) * 100  (N = number of days to future contract delivery)

Determines the percentage of discount or premium for the forward rate relative to the spot rate (must be quoted on a direct basis).

 

2.