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International Trade and Finance PPTs series 6 April 2014.

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Presentation on theme: "International Trade and Finance PPTs series 6 April 2014."— Presentation transcript:

1 International Trade and Finance PPTs series 6 April 2014

2 Introduction Part I Trade 1. Theories of Trade a) Motives for Trade b) Absolute Ádvantage c) Comparative Advantage d) Extensions 2. Barriers to Trade a) Non.tariffary Barriers b)Tariffs c) Quotas d) Subsidies Part II Finance 1.The Balance of Payments 2. Foreign exchange 3. Exchange Regimes 4. Agents and their Activities a) Spot and Forward Markets b) Export and Import c) Spot Speculation d) Forward Speculation e) Interest arbitrage 5. Selected Exchange Rate Theories List of Contents April 2014

3 © Dr. Helmut Less Spot and Forward markets Spot market: agreement on price and quantity of foreign exchange and transaction trake place simultaneously Forward market: agreement on price and quantity of foreign exchange takes place today, but transaction at a specified later date

4 April 2013 © Dr. Helmut Less Abbreviations Exchange Rate e Spot Exchange Rate e s Forward Exchange Ratee f Swap Rates = (e f – e s )/e s Expected Spot Exchange Ratee * Foreign Interest Ratei f Domestic Interest Ratei Gross interest differentiald g = i f – i Net interest differentiald = i f – i + s

5 April 2014 © Dr. Helmut Less Activities on foreign exchange markets Export and import Speculation in spot exchange Speculation in forward exchange Covered interest arbitrage Uncovered interest arbitrage

6 April 2014 © Dr. Helmut Less Export and Import: Rules Payment immediate: Spot market Payment delayed: Exporter: if e s * > e f  spot market at date of payment if e s * < e f  forward market today Importer: if e s * < e f  spot market at date of payment if e s * > e f  forward market today (Hint: Risk preference or aversion will play a roll)

7 Summer 2013© Dr. Helmut Less Export of merchandise worth 20 Million $ e s = 2,00e s * = 1,92e f = 1,91 (both for 3 months) a) Payment immediate  sale of $ spot today b) Payment in three months - Risk lover: wait and sell spot in three months - risk averter: sell forward today Export and Import: Example

8 April 2014© Dr. Helmut Less Speculation in Spot Exchange: Rules If e s * > e s  buy spot today, sell spot later If e s * < e s  sell spot today, buy spot later

9 April 2014© Dr. Helmut Less Speculation in Forward Exchange: Chance e f = 0,84 e s * = 0,81 Sell 3-months forward today, wait until three months elapse. Assuming a correct guess, buy spot and collect a profit of 0,03 EUR per $ commitment. Or, if the guess was wrong and the spot rate hits i.e. e s = 0,85 lose 0,01 EUR per $ commitment

10 April 2014© Dr. Helmut Less Speculation in Forward Exchange: Rules If e f > e s *  sell forward today, buy spot at time of maturity and fulfill forward contract If e f < e s *  buy forward today, sell spot at time of maturity and fulfill forward contract

11 April 2014© Dr. Helmut Less Covered Interest Arbitrage: Problem From the domestic perspective: i f = 6% and i = 4% could be a motive to invest into US securities. What if at time of maturity $ depreciates from e s1 = to e s2 = 0,72? Investers would incurr a loss. Solution: swap = simultaneous spot a forward transaction.

12 April 2014© Dr. Helmut Less Covered Interest Arbitrage: Rules If d = i f – i + (e f – e s )/e s > 0  buy spot today, sell forward today If d = i f – i + (e f – e s )/e s < 0  sell spot today, buy forward today

13 April 2014© Dr. Helmut Less Uncovered Interest Arbitrage: Rules If i f – i + (e s * – e s )/e s > 0  buy spot today, sell spot later If i f – i + (e s * – e s )/e s < 0  sell spot today, buy spot later


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