1. 7 Foreign Exchange Risk and Risk Control Instruments Name: Thoeun Sarkmark Na ID: 092SIS37

2. Foreign currency movement in exchange rate, which is the risk for investor that depend on US $ and foreign currency. Foreign currency depreciates, US $ appreciate $ value of the case flow will be proportionately less and leading to FXR. Foreign Exchange Risk Foreign Exchange Rate Spot Market Cross RateDealers Instruments for Hedging F.X.R

3. Spot Market The securities or commodities market, which good are sold for cash and delivered immediately - Related to spot exchange rate market, is the market for settlement of as foreign exchange transaction Changing in country’s exchange rate with other currency – relate to inflation rate Domestic inflation rate Inversely proportional to foreign inflation

4. Spot Market (Con’t) Exchange rate between 2 countries other than the US can be inferred from their exchange rate with the US $.

5. Instrument for Hedging FXR  Forward contract bt. parties – agree to sell & buy for a specific price at a designate date in the future.  Maturity less than 2 years  Can be use to lock in a certain price  Pricing currency forward contracts: (the rate that investor borrow and lend, it would be the same rate).  Foreign exchange future contracts – the major currency of trade on the Inter’l Monetary Market.  The future contracts of each country promised to delivery the money by the price that promised.  The largest maturity is 1 year. Currency forward contracts Currency futures contracts

6. Instrument for Hedging FXR (Con’t)  There 2 types of currency option contracts: 1. future option are trade on IMM – trading location for currency future contracts. 2. Options on the foreign currency: have been trade on the Philadelphia Exchange 1982 – FC underlying the options  Transaction of 2 parties agree to exchange interest payment and principle.  Need to protect is Currency coupon swap. (the interest rate in one currency is fixed and the interest rate in other is floating).  Illustration for development of the currency swap market. Currency option contracts Currency Swap The contract that give holder right to buy or sell currency in the future for a specific price If the world market imperfection, the issuer can: - Reduce the borrowing cost by borrowing funds denominated in a foreign currency and hedging the associated exchange rate risk