Foreign Exchange
About the Lecture
The lecture Foreign Exchange by Edu Pristine is from the course Archiv - Financial Markets and Products. It contains the following chapters:
- Agenda
- Introduction to Foreign Exchange Risk
- Sources of profits and losses on foreign exchange trades
- Unhedged foreign asset and liabilities
- Balance sheet hedging
- Interest rate parity
Author of lecture Foreign Exchange
Edu Pristine
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Excerpts from the accompanying material
... (Confidential) AgendaIntroduction Sources of profits ...
... GBP exposure = net GBP assets – net GBP bought. A positive net exposure (net long) is subject to the risk that the foreign currency will fall while a negative net exposure (net short) is subject to the risk that the foreign currency will rise ...
... differences between income and costs of funds. In foreign exchange markets, an extra dimension “foreign exchange rate” comes into play, increasing the volatility of net returns of the bank if ...
... CDs maturity 1 year. What is the return for the bank if: 1.Exchange rate is unchanged 2.If exchange rate of euro has fallen from 1.2 ...
... funds = 5% Therefore, net return = 4.5% 2. Issued euro loans= 10,000,000/1.2= 8333,333 euros; End of maturity at 12% interest, 8,333,333*1.12=9,333,333 Dollar value=9,333,333*1.05=9,800,000.. i.e 2% loss ...
... of the previous example after hedging 6 Assets. LiabilitiesUSD 10 million 7% US loans, maturity 1 year USD 10 million equivalent 12% Euro loans, 1-year ...
... in a positive return. Steps: 1. The bank borrows USD 10 million equivalent of Euros for a year at 9%. i.e., 10/1.2 = 8,333,333 Euros 2. Pays back the Euro CD holders at the end of maturity i.e., ...
... the forward exchange rate falls to completely eliminate the attractiveness of Euro investments. This is called Interest Rate Parity (IRP) 8 Where; DC = Domestic currency rate FC ...
... Japanese investor can invest in Japanese Yen at 4.5% or ...
... 78 Agenda Introduction Sources of profits and ...
... net GBP exposure = net GBP assets - net GBP bought appositive net exposure (net long) is subject to the risk that the foreign currency will fall while a negative net exposure (net short) is subject to the risk that the foreign currency will rise. ...
... between income and costs of funds. In foreign exchange markets, an extra dimension “foreign exchange rate” comes into play increasing the volatility of net returns of the bank if unshed ...
... CDs maturity 1 year. What is the return for the bank if: 1. Exchange rate is unchanged 2. If exchange rate of euro has fallen from 1.2 ...
... 5%. Therefore, net return = 4.5% 2. Issued Euro loans = 10,000,000/1.2 = 8333,333 Euros. End of maturity at 12% interest, 8,333,333/1.12 = 9,333,333 Dollar value = 9,333,333/1.05 = 9,800,000.. i.e 2% loss ...
... previous example after hedging 83 assets liabilities USD 10 million 7% US loans, maturity 1 year USD 10 million equivalent 12% Euro loans, 1-year maturity ...
... a positive return. Steps: 1. The bank borrows USD 10 million equivalent of Euros for a year at 9%. i.e., 10/1.2 = 8,333,333 Euros 2. Pays back the Euro CD holders at the end of maturity i.e. ...
... equilibrium, the forward exchange rate falls to complete by eliminate the attractiveness of Euro investments. This is called Interest Rate Parity (IRP) 85 Where; r DC= Domestic currency rate ...
... japanese investor can invest in Japanese Yen at 4.5% or ...
... (1+R fc) = .01 * (1.045/1.0467) = ...
