Exam 9: International Financial Markets

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Unlike domestic transactions,international transactions involve the currencies of two or more nations.To exchange one currency for another in international transactions,companies rely on a mechanism called the foreign exchange market-a market in which currencies are bought and sold and their prices are determined.Financial institutions convert one currency into another at specific exchange rate-the rate at which one currency is exchanged for another.Rates depend on the size of the transaction,the trader conducting it,general economic conditions,and sometimes government mandate.
The foreign exchange market is not really a source of corporate finance.Rather,it facilitates corporate financial activities and international transactions.Investors use the foreign exchange market for four main reasons.
Currency Conversion-Companies use the foreign exchange market to convert one currency into another.
Currency Hedging-The practice of insuring against potential losses that result from adverse changes in exchange rates is called currency hedging.International companies commonly use hedging for one of two purposes:
1.To lessen the risk associated with international transfers of funds
2.To protect themselves in credit transactions in which there is a time lag between billing and receipt of payment.
Currency Arbitrage-It is the instantaneous purchase and sale of a currency in different markets for profit.
Currency Speculation-It is the purchase or sale of a currency with the expectation that its value will change and generate a profit.The shift in value might be expected to occur suddenly or over a longer period.The foreign exchange trader may bet that a currency's price will go either up or down in the future.