Exchange Rate and International Financial Management
Chapter 1: Overview of International Financial Management
Chapter Objective:
Understand why it is important to study international finance. Distinguish international finance from domestic finance.
1.1 International VS. Domestic
l Domestic Finance à $ $ $ $
l International Finance à $ € ¥ £
l So you simply have some currencies other than $
l What’s up with that? Well.., you have to convert $ to the foreign currency that you might need using (aka. Forex)
l £/$ = 1.50
l £1.5 / $1
l £1.5 is equivalent to
l Say.. if the £/$ turns out to be £1.00/$, $ is stronger (more expensive)/weaker (cheaper)?
l Yeah.. $ is
l This also means that £ is stronger (more expensive)/weaker (cheaper)?
l £ is
l Confused? Then let’s change $ to be an apple.
l £1.5/apple turns out to be £1.00/apple.
l apple is
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The important thing in this class is the Forex is exchange rate risk.
so we have something so called foreign
1.2 Foreign Exchange Rate Risk
n The risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements.
n Suppose $1 = ¥100 and you buy 10 shares of Toyota at ¥10,000 per share.
Total investment = ¥10,000/share x 10 shares =
n One year later the investment is worth ten percent more in yen: ¥110,000
n But, if the yen has depreciated to $1 = ¥120, your investment has actually lost money in dollar terms. Your $1,000 investment is only worth $916.67. Why so? n With the same $1 you get ¥20 more.
n So $ is stronger (or more expensive) ß appreciation in $.
n With the same token, it means that ¥ is
n You have ¥110,000 from the investment but let’s convert the money back to US$.
n ¥110,000 x ($1 / ¥120) =
Chapter Objective:
Understand why it is important to study international finance. Distinguish international finance from domestic finance.
1.1 International VS. Domestic
l Domestic Finance à $ $ $ $
l International Finance à $ € ¥ £
l So you simply have some currencies other than $
l What’s up with that? Well.., you have to convert $ to the foreign currency that you might need using (aka. Forex)
l £/$ = 1.50
l £1.5 / $1
l £1.5 is equivalent to
l Say.. if the £/$ turns out to be £1.00/$, $ is stronger (more expensive)/weaker (cheaper)?
l Yeah.. $ is
l This also means that £ is stronger (more expensive)/weaker (cheaper)?
l £ is
l Confused? Then let’s change $ to be an apple.
l £1.5/apple turns out to be £1.00/apple.
l apple is
--------------------------------------------------------------------------------------------------------------------------------------
The important thing in this class is the Forex is exchange rate risk.
so we have something so called foreign
1.2 Foreign Exchange Rate Risk
n The risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements.
n Suppose $1 = ¥100 and you buy 10 shares of Toyota at ¥10,000 per share.
Total investment = ¥10,000/share x 10 shares =
n One year later the investment is worth ten percent more in yen: ¥110,000
n But, if the yen has depreciated to $1 = ¥120, your investment has actually lost money in dollar terms. Your $1,000 investment is only worth $916.67. Why so? n With the same $1 you get ¥20 more.
n So $ is stronger (or more expensive) ß appreciation in $.
n With the same token, it means that ¥ is
n You have ¥110,000 from the investment but let’s convert the money back to US$.
n ¥110,000 x ($1 / ¥120) =