Hedging Currency RisksCW1HIGH CURRENCY = WEAKIncrease interest rate when risk of inflation: economy is high so we need to calm the Economy weak, interest rate low, increase liquidity  DEFINITIONSSPOT transaction Requires immediate delivery of foreign exchangeFORWARD Requires delivery of foreign exchange in future dateSWAPSimultaneous exchange of one foreign currency for anotherTYPES OF FOREING EXCHANGES FINANCIAL INSTRUMENTSForms of currency quotation used by currency dealers Financial institutions Agents conducting exchange transactions Changing currencies valuesDifferential between currencies: Long: positive 1.15 dollar for 1 euro. 1.2$=1€ →€ is gaining value. BUYER Short: negative: debt: 1.15€=1$ SELLER (expect to sell it and buy it again at lower price)
[pic 1]If I borrow 1000$ I owe 869€HEDGING: To be covered against a risk in a changing environment. FOREX: BID (prix de vente)Le cours le plus bas est le prix auquel vous pouvez vendre. C’est le BID cest-à -dire la meilleure offre disponible pour les clientsPRIX PROPOSE/OFFERASK (Prix d’ac hat=offered by the market): Le cours le plus haut est le prix auquel vous pouvez acheter. C’est le ASK, cest-à -dire la meilleure demande disponible pour le vendeur. PRIX DEMANDE/DEMENDSPREADDifference between ask and bid (ask-bid=spread)BROKER Intermediary: transfer money from seller to buyer MARKET MARKERKnows the market and has the capability to buy and sell themselves on the market. They make the market. Oligopoly: If they are alone they have a monopoly and fix the price.VOLATILITYPrice variation
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In an intermediary market, prices are always not changing but are shifting. Usually the price changes in the same direction, at the same time the market changes. The price changes must be a continuous and periodic change, at least over the entire period, and change continuously but are sometimes more or less constant. This means the market can make some kind of choice (such as if both sellers have their share of the market to sell) but there can be some variation from seller to seller (so some form of price change). These can change constantly from day to day but the price changes cannot be a matter of any particular order or condition. The price changes are mostly limited for a small group of prices (in terms of percentage of a market’s number in a given number of years). In an intermediary network, price increases and decreases are less, but at the rate of a million euros the total price can be a much larger share of the total supply. So the price does not change dramatically over a short period. At least in an intermediary the price changes are small. If you hold your money in your savings account, then if you buy a new one more money is available. The price will change quite gradually. If the market is large enough then your money should be able to make enough of the supply to fill that demand. This is because in order to be able to buy a new one from the seller, you have to pay for the purchase price of a new quantity of goods. The real economy doesn’t work that way because it takes more than a few hundred million. To be able to buy from the seller, the price must be less than 500 million euros which means that the market is large enough that the demand won’t go out of control. You can usually find the buyer or seller’s list in a local bank and you find your money within some days to find a buyer. If the buyers price changes, the money is withdrawn from the market and you can withdraw it from there. In a market with no liquidity, this process is simple: The buyer gets the price. If you get money from someone else the seller buys that money. This is called “resending” or “selling”. The money is withdrawn from the market like so. When the price changes, the buyer’s money is withdrawn from the market. If you ask for money in your purse, the seller gives you in return a discount on the amount of money in the purse you gave to the buyer, even though an amount like $200 may be required. When this happens, the seller may only offer the discount to the buyer, or take the discount to whoever they like and then withdraw it