FMP 9. Foreign Exchange Markets

Learning Objectives

1) Explain and describe the mechanics of spot quotes, forward quotes, and futures quotes in the foreign exchange markets; distinguish between bid and ask exchange rates.

2) Calculate a bid-ask spread and explain why the bid-ask spread for spot quotes may be different from the bid-ask spread for forward quotes.

3) Compare outright (forward) and swap transactions.

4) Define, compare, and contrast transaction risk, translation risk, and economic risk.

5) Describe examples of transaction, translation, and economic risks and explain how to hedge these risks.

6) Describe the rationale for multi-currency hedging using options.

7) Identify and explain the factors that determine exchange rates.

8) Calculate and explain the effect of an appreciation/depreciation of one currency relative to another.

9) Explain the purchasing power parity theorem and use this theorem to calculate the appreciation or depreciation of a foreign currency.

10) Describe the relationship between nominal and real interest rates.

11) Describe how a non-arbitrage assumption in the foreign exchange markets leads to the interest rate parity theorem and use this theorem to calculate forward foreign exchange rates.

12) Distinguish between covered and uncovered interest rate parity conditions.