International Finance - Assignment Example

COLLEGE OF BUSINESS AND FINANCE DEPARTMENT OF BANKING AND FINANCE 2nd semester Assignment 2 FINC 506 : International Finance Name: ------------------- ----- Number: ------------------ --- Section # ----- ( ) 1. Definitions, Define the following terms:a. Foreign exchange market: The market functions through the provision of an institution as well as the physical organization where a country’s money exchanged for that of another.

Prior the transaction, a determination of the rate of exchange fist takes place (Eighth 2012).b. Foreign exchange transaction: It is a transaction involving a buyer and seller; they make an agreement of a fixed amount of a currency delivered for another currency at a rate specified (Eighth 2012). It could be through book entry accounting, funds transfer or any other type of a payment order. c. Foreign exchange: It refers to a foreign country’s money. The currencies are bank notes, drafts and foreign currency balances. 2. What are the three major functions of the foreign exchange market?a) Credit functions The market is principal in the provision of foreign trade credit.

These are bills of exchange with a period of maturity of about three months. The bills used for international payments. Credits required by importers to have possession of goods, after which they sell them and pay off their bills (Eighth 2012, pp. 10-12). a) Hedging functionsHedging happens when importers and exporters engage an agreement to buy and sell goods at a future date in current prices. The significance of this is avoidance of losses that caused by variation of exchange rates (Eighth 2012, pp. 10-12).b) Transfer functionTransfer of purchasing power between countries involved in a transaction.

It functions through credit instruments such as bank drafts and telephonic transfers (Eighth 2012, pp. 10-12). 3. Define each of the following types of foreign exchange transactions:a. Spot: It is an agreement between two parties in order to exchange currencies. The transaction carried out once for commercial customers and on the subsequent business day for the inter-bank traders (Eighth 2012, pp. 7-8).b. Outright forward: It is a transaction agreement made to exchange currencies today. The date for the exchange specified time in the future.

The rate of exchange set today (Eighth 2012, pp. 5-7).c. Forward-forward swaps:It is a more refined form of transaction. A technique shelters the borrowing a currency on a collateralized basis (Eighth 2012, p. 5). For instance, the dealer sells £18,000 forward for dollars. The delivery is in three months at $ 2.4531/£. The dealer simultaneously buys 18,000,000 forward for the delivery in a subsequent four months at a $ 2.4331. The difference accrued due to the difference between the selling and buying price has an equivalent rate differential. 4. Define and give an example of each of the following quoteThis Foreign exchange rate quotation referred to as offer (also bid and ask).

The price of a currency at which a dealer will buy another currency is the bid.Subsequently, Ask refers to the price the dealer sells the other currency (Eighth 2012). The dealers bid at a particular price and ask at a price higher, therefore, making profits from the difference.For instance, for a company Y stock. The bid price may be quoted at $ 60.00 while the ask price at $ 62.21. Then the different between these prices related to the bid-ask price is $2.21 5 With reference to interbank quotations, what is the difference between American terms and European terms?

Terms and the number of units of foreign currency that is required to purchase a dollar are most common denominator in foreign currencies (Eighth 2012, pp. 10-12). For example, the exchange rate between the US dollar and the Swiss franc:The European termsSF1.5700/$ read as “1.5700 Swiss franc per dollar.”The American terms $ 0.5831/SF read as “0.5831 dollars per Swiss franc.” 6. Define and give an example of a direct quote between the U.S. dollar and the Mexican peso, where the United States is designated as the home country.

The currency price of a unit of foreign currency is known as a direct quote.An example using Mexico and United States as the home country is: $0.1271/Peso ReferencesEighth, H 2012, Options, Futures, and other Derivatives, Pearson Higher Education.