Financial Analysis. Lesson 19. International Finance and Foreign Exchange
Financial Analysis. Lesson 19. International Finance and Foreign Exchange
International finance studies financial interactions across countries and global markets.
Foreign exchange (Forex) market is where currencies are traded globally.
Exchange rate is the value of one currency relative to another.
Currency pair represents two currencies, quoted as the exchange rate.
Spot rate is the current exchange rate for immediate currency transactions.
Forward rate is the agreed-upon rate for a future currency transaction.
Cross rate calculates exchange rates between two non-USD currencies.
Foreign exchange risk involves losses due to unfavorable currency fluctuations.
Translation risk arises when consolidating financial statements in different currencies.
Transaction exposure refers to gains or losses from currency rate changes.
Economic exposure impacts a firm’s market value due to currency shifts.
Hedging foreign exchange risk protects against potential losses in currency movements.
Currency futures are standardized contracts for buying or selling currencies later.
Currency options give the right, not obligation, to exchange currencies.
Arbitrage in Forex exploits price differences between currency markets.
Balance of trade is the difference between a country’s exports and imports.
Capital flow tracks money moving into and out of a country.
Purchasing power parity (PPP) compares currency values based on price levels.
Interest rate parity explains the relationship between interest rates and exchange rates.
Currency peg fixes a currency’s value relative to another currency.
Technical Examples:
Spot rate determines immediate costs when converting currencies for transactions.
Hedging foreign exchange risk minimizes potential losses from currency fluctuations.
Currency futures provide stability in future international transactions by locking rates.