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Lecture note Essentials of corporate finance – Chater 18: International aspects of financial management

In this chapter you will understand how exchange rates are quoted and what they mean, know the difference between spot and forward rates, understand purchasing power parity and interest rate parity and the implications for changes in exchange rates, understand the types of exchange rate risk and how they can be managed, understand the impact of political risk on international business investing. | 18- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18- Key Concepts and Skills Understand How exchange rates are quoted and what they mean The difference between spot and forward rates Purchasing power parity and interest rate parity and the implications for changes in exchange rates The types of exchange rate risk and how it can be managed The impact of political risk on international business investing 18- Chapter Outline 18.1 Terminology 18.2 Foreign Exchange Markets and Exchange Rates 18.3 Purchasing Power Parity 18.4 Exchange Rates and Interest Rates 18.5 Exchange Rate Risk 18.6 Political Risk 18- International Finance Terminology American Depositary Receipt (ADR) Security issued in the U.S. representing shares of a foreign stock Can be traded in the U.S. Cross-rate Implicit exchange rate between two currencies when both are quoted in a third (usually dollars) currency. Eurobond Bond issued in multiple countries | 18- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18- Key Concepts and Skills Understand How exchange rates are quoted and what they mean The difference between spot and forward rates Purchasing power parity and interest rate parity and the implications for changes in exchange rates The types of exchange rate risk and how it can be managed The impact of political risk on international business investing 18- Chapter Outline 18.1 Terminology 18.2 Foreign Exchange Markets and Exchange Rates 18.3 Purchasing Power Parity 18.4 Exchange Rates and Interest Rates 18.5 Exchange Rate Risk 18.6 Political Risk 18- International Finance Terminology American Depositary Receipt (ADR) Security issued in the U.S. representing shares of a foreign stock Can be traded in the U.S. Cross-rate Implicit exchange rate between two currencies when both are quoted in a third (usually dollars) currency. Eurobond Bond issued in multiple countries but denominated in the issuer’s home currency 18- International Finance Terminology Eurocurrency (Eurodollars) Money deposited in a financial center outside the country of the currency involved “Eurodollars” = dollar-denominated deposits in banks outside the U.S. banking system Foreign bonds Sold by foreign borrower Denominated in currency of the country of issue Gilts British and Irish government securities 18- International Finance Terminology London Interbank Offer Rate (LIBOR) Rate international banks charge each other for loans of Eurodollars overnight in the London market Frequently used as a benchmark rate for money market instruments Swaps Interest rate swap = two parties exchange a floating-rate payment for a fixed-rate payment Currency swap = agreement to deliver one currency in exchange for another 18- Global Capital Markets Number of exchanges in foreign countries continues to increase, as does the liquidity on those exchanges Exchanges facilitate .