COMMERCE 3FA3 Study Guide - Final Guide: Net Present Value, Canadian Dollar, Fisher Hypothesis
5 Jun 2018
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Cross-rate is implicit exchange rate between two currencies when both are quoted in some third currency (usually
USD)
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Issued outside restrictions applying to domestic offering, are syndicated, mostly traded from London
though trading can occur anywhere
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Most are bearer bonds not registered to bondholders and can be transferred without records
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Provide opportunities for tax evasion and are arranged through underwriting
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Eurobond is a bond issued in multiple countries and denominated in a single currency (usually issuer home
currency) that helps raise capital for governments and international corporations
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Eurobanks make loans and accept deposits in foreign currencies
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Eurocurrency is money deposited in a financial centre outside of the country whose currency is involved -
Eurodollars are USD deposited in banks outside the US banking system - EuroCanadian are CAD
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Export Development Canada (EDC) is a crown corporation with the mandate to promote Canadian exports,
providing financing for foreign companies that purchase Canadian exports while insuring exporter receivables and
providing coverage against loss of assets - mostly small businesses
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Foreign bonds international bonds issued in a single country, denominated in that country's currency (with
distinction drawn between it and domestic issues with tougher regulations and disclosure) that must be registered
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Gilts British/Irish government securities including issues of local British authorities and some overseas public-
sector offerings
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London Interbank Offer Rate (LIBOR) rate most international banks charge one another for loans of Eurodollar
overnight in London market - is the cornerstone of pricing of money market issues and short-term debt by
corporations and government
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Swaps are agreements to exchange two securities or currencies
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Terminology
Foreign Exchange Markets and Exchange Rates
Importers paying for goods involving foreign currencies
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Exporters who receive foreign currency (convert to domestic)
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Portfolio managers buying/selling foreign stocks and bonds
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Foreign exchange brokers that match buy and sell orders
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Traders who "make a market" in foreign exchange
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Speculators trying to profit from exchange rate changes
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The largest financial market is the foreign exchange (FX) market where one country's currency is traded for another. It is
over-the-counter. Participants include:
Take Canadian currency and buy first foreign currency
1.
Take foreign currency amount and buy second foreign currency
2.
Take second final currency and buy Canadian to obtain a risk-free profit
3.
Cross Rates and Triangular Arbitrage
Types of Transactions
A spot trade is an agreement to exchange currency on the spot (within 2 business days) - the exchange rate is the
spot exchange rate
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Forward premiums occur when the domestic currency appreciates and discounts occur when it depreciates
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A forward trade contract is one between two parties to exchange currencies in the future at a fixed rate, the
forward exchange rate - not speculation, as it manages the risk of unfavourable shifts in exchange rate for
individuals and companies
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Exchange rates are the price of one country's currency expressed in another - usually the USD.
Purchasing Power Parity
Transaction costs are , there are no barriers such as taxes/tariffs, and commodities are identical in both
locations
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Absolute PPP occurs when prices of goods are the same everywhere after exchange (only applicable to uniform
traded goods) and can only hold if:
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Purchasing power parity (PPP) is the idea that exchange rates adjust to keep purchasing power constant among
currencies.
International Corporate Finance
March 30, 2018
3:55 PM
Managerial Finance Page 1
