international finance by jeff madura

OUTLINE
Module 1: The World of International Finance and the Multinational Corporation
I. The World of International Finance and the Globalization of International Financial Markets:
A. The World of International Finance
B. Globalization of Capital Markets
II. The Multinational Corporation
A. The Multinational Corporation and its Goal
B. Conflicts and Constraints in Implementing the Goal
III. Theories of International Business
A. Theory of Comparative Advantage
B. Imperfect Markets Theory
C. Product Cycle Theory
IV. Methods of International Business
A. International Trade
B. Direct Foreign Investment
C. Licensing
D. Franchising
E. Joint Ventures
V. Multinational Firm versus Domestic Firm
A. Marginal Return on Projects
B. Marginal Cost of Capital
C. Size of the Firm
VI. Risks of International Business
A. Exchange Rate Risk
B. Business Risk
C. Political Risk
VII. Answers to Questions Raised in the Lecture
Module 2: Foreign Exchange Markets
I. Introduction
II. Need for Foreign Currencies
III. Spot Markets versus Forward Markets

IV. Direct Quotes versus Indirect Quotes
V. Computing Percent Change for a Foreign Currency
VI. Bid, Ask Prices and Bid/Ask Percent Spread
VII. Cross Exchange Rates
VIII. Currency Forward Contracts and Forward Premium/Discount
IX. Currency Futures
X. Currency Options
XI. Questions and Problems
Module 3: Arbitrage and the Theory of Interest Rate Parity
I. International Arbitrage and Interest Parity
A. International Arbitrage
1. Locational Arbitrage
2. Triangular Arbitrage
3. Covered Interest Arbitrage
B. Theory of Interest Rate Parity
II. Purchasing Power Parity
III. International Fisher Effect
Module 4: Forecasting Exchange Rates
I. Why Multinationals Forecast Exchange Rates?
II. Forecasting Techniques
A. Technical Forecasting
B. Fundamental Forecasting: Regression Approach
C. Market Based Forecasting
D. Mixed Forecasting
III. Forecast Performance of Consulting Firms
IV. Assessment of Forecast Accuracy Over Time
V. A Comprehensive Regression Example
VI. Forecasting Performance and Market Efficiency
VII. Questions and Problems
Module 5: Currency Futures, Forward Contracts, and Options

I. Currency Futures
A. Interpreting Currency Futures Quotes
B. Speculating with Currency Futures
C. Hedging with Currency Futures
II. Forward Contracts and Hedging
III. Currency Options
A. Call Options
1. Interpreting Currency Call Option Information
2. Speculating with Call Options
3. Hedging Payables with Call Options
4. Factors Affecting Call Option Premium
B. Put Options
1. Interpreting Currency Put Option Information
2. Speculating with Put Options
3. Hedging Receivables with Put Options
4. Factors Affecting Put Option Premium
Module 6: The Nature and Control of Foreign Exchange Risk
I. Foreign Exchange Risk and Types of Foreign Exchange Risk
II. Relevance of Exchange Rate Risk
III. Types of Foreign Exchange Risk
IV. Managing Transaction Exposure
A. Identification of Net Transaction Exposure
B. Forecast of Exchange Rates and the Decision to Hedge or not to Hedge
C. Techniques for Managing Transaction Exposure
D. Comprehensive Examples of Hedging Transaction Exposure
1. Hedging Payables
a. Forward Contract Hedge
b. Money Market Hedge
c. Currency Call Option Hedge
d. No Hedge

2. Hedging Receivables
a. Forward Contract Hedge
b. Money Market Hedge
c. Currency Put Option Hedge
d. No Hedge
E. Managing Long-term Transaction Exposure
F. Other techniques to Manage Transaction Exposure
V. Managing Economic Exposure
A. Diversifying Operations
B. Diversifying Financing Globally
VI. Questions and Problems
Module 7: Case Analysis of Foreign Exchange Risk Management: Lufthansa
I. Evaluation of Hedging Alternatives
A. Remaining Uncovered
B. Full Forward Cover
C. Partial Forward Cover
D. Foreign Currency Options
E. Buy Dollars Now
II. The Decision
A. The Rise of DM
B. The Fall of DM
C. How It Came Out?
D. Questions
Module 8: Corporate Use of Innovative Foreign Exchange Risk Management
Products
I. Characteristics of Respondent Corporations
II. Use of Foreign Exchange Risk Management Products
III. Differences Across Industries
IV. Influence of Firm Size and Degree of International Involvement
V. Summary

VI. Questions for Fxrisk News Group Discussion
Module 1 : The World of International Finance and Multinational Corporations
"What is prudence in the conduct of every private family can scarcely be folly in that of great kingdom. If a
foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of
them with some part of the produce of our own industry employed in way in which we have some
advantage" (Smith, The Wealth of Nations, 1776).
Objectives and Theme:
Our first objective is to discuss the exciting world of Global Financial Markets; our second objective is to
learn the Characteristics of the Multinational Corporation (MNC); we find that MNCs have goals similar to
that of the purely Domestic Corporation (DC); however, they have a wider variety of opportunities around
the globe. With additional opportunities come increased potential returns and other forms of risk to
consider. The potential benefits and risks are introduced and explained
Globalization of Financial Markets
For more than 25 years, there has been an increasing globalization of the world financial markets. A
worldwide financial network of financial centers consisting of London, New York, Tokyo, Frankfurt, Zurich,
Hong-Kong, Paris, Amsterdam etc., has evolved. This has led to the global presence of international
financial institutions, increased financial integration, and a rapid evolution of innovative new financial
products.
Increased flows of world capital intensifies competition among nations, leading to deregulation of
domestic financial markets and further liberalization of capital movements around the globe. Financial
integration refers to the elimination of barriers between domestic and international financial markets and
the development of many linkages between these market sectors. As a result, financial capital flows
unrestricted between the two markets, enhancing various borrowing, lending, and investing activities. On
the innovative side, there has been the creation of new financial instruments and technologies. Some of
these instruments include Eurodollar CDs, zero-coupon Eurobonds, syndicated Eurocurrency loans,
interest and currency swaps, and floating rate notes. Technological innovations in telecommunications,
information dissemination, and computers have accelerated and reinforced this trend toward globalization
The Multinational Corporation
Multinational Corporation (MNC) and its goal:
We can define an MNC simply as a corporation operating in more than one country.

The goal or objective of the MNC should be the maximization of stockholders' wealth or the stock price.
This objective is the same for purely domestic corporations as well.
Stockholder Wealth equals Stock Price * # of Shares Outstanding.
Maximizing the Shareholders' Wealth confers the following Advantages:
1. It considers the Time Value of Money.
How does the stock price maximization objective consider the time value of money ?
The answer to this question is at the end of this Module.
2. It also considers the riskiness of the cash flows of the MNC.
How does maximizing stock price consider the riskiness of cash flows ?
The answer to this question is at the end of this Module as well.
An idea of the biggest Fortune 500 global industrial and service companies ranked by various criteria can
be obtained from visiting Fortune. The global 500 corporations have been ranked by revenues; there is
also a country wide ranking available using various criteria.
Based on the information from the Fortune list of Global 500, please check your knowledge by answering
the following questions.
1. Can you name the company that recorded the highest profit increase within the lastest year or
quarter?
2. Which company headed the list in terms of revenues? And how much was the revenue of that
company?
3. Which US company had the highest revenue within the lastest year or quarter? What was its rank
in terms of revenue in the previous year or quarter?
4. In the Pharmaceuticals industry, which company led the list in terms of revenues for the latest
year or quarter? And what was its revenue?
Conflicts and Constraints in Implementing the Goal
Conflicts: In the corporate form of organization, stockholders are the true owners of the corporation. There
are often millions of stockholders for a given corporation, and, therefore, stockholders select managers to
operate and manage the corporation from day-to-day. In this setup, the stockholders are the principals,
and the managers are the agents. Thus, there is an agency relationship between the stockholders and
the managers. Sometimes the managers, instead of acting in the best interests of stockholders, may act
to maximize their own interests. For example, the top manager may go for a corporate jet, install his office

in a penthouse suite overlooking the Hudson river, install plush carpeting, or hire a pretty secretary.
These problems are called agency problems, and the costs are called agency costs. These agency costs
affect the cash flows and, therefore, the stock price.
Because MNCs have subsidiaries around the globe and often have several layers of management, the
agency costs of an MNC are higher than for purely domestic corporations.
Constraints: The constraints in implementing the goal of the MNC are:
1. Environmental: Each country imposes its own environmental regulations,
2. Regulatory: Each host country can enforce taxes, earnings remittance restriction, job protection,
and
3. Ethical: There is no consensus standard of business conduct that applies to all countries. A
business practice that is considered to be unethical in the U.S. may be totally ethical in another
country.
All of these constraints add additional costs to the MNC and increase the cost of doing business. These
constraints can act as a drag on the goal of maximizing stockholder wealth.
Theories of International Business
Theory of Comparative Advantage - Specialization: Specialization of products and services can increase
both individual and global efficiency. Since specialization in some products may result in no production of
some goods in a given country, there is a need for international business or trade.
For example, consider a two country world of the USA and Japan. Let us assume that Japan can produce
television sets of comparable quality at a cheaper price than the US. Let us also assume that the US has
cost advantages in the production of automobiles. In this setup, the US will import television sets from
Japan, while Japan will import automobiles from the US. Since both products are produced at the lowest
possible cost, global efficiency is enhanced.
Imperfect Markets Theory: Due to imperfect markets and the resulting immobility of resources, resources
cannot be easily and freely retrieved by the MNC. Consequently, the MNC must sometimes go to the
resources rather than retrieve resources such as low cost land, labor etc.
An example would be US auto manufactures setting-up factories in Mexico to take advantage of the low-
cost labor there.
Product Cycle Theory: A firm is likely to market its product first in the home country due to the ready
availability of information about markets and competitors. As the market in the home country matures, the

corporation, seeking foreign demand, initially exports its product. After learning more about the foreign
country and how to gain advantage over competitors in foreign countries, the firm opens production
facilities overseas.
Figure # 1 provides a flow chart of Product Cycle Theory.
Note: This Figure is reproduced from permission from International Financial Management, Sixth Edition, Jeff Madura. Copyright © 2000 by
West Publishing Company. All Rights Reserved.
Question: Do you think that the three theories of international business, Theory of Comparative
Advantage, Imperfect Markets Theory, and Product Cycle Theory, are complementary or competitive?
Provide justification for your answer.
Methods of International Business
International Trade: Exporting: A business firm may maintain its production facilities within the territory of
its home nation and export its products to foreign countries. Exporting is a safer way to break into a new
market since there is less to lose if the strategy fails. The advantage of this approach is lower fixed
production costs; but, the disadvantage is higher transportation costs.
Direct Foreign Investment (DFI): A business firm located in one country may acquire facilities that enable
it to produce a product or render a business service within the territory of another country. An MNC may
initiate DFI by either establishing a new subsidiary, opening a factory or purchasing an existing company
in that country. An essential element of DFI is the investor's involvement in the management of the
productive assets. The investor has total managerial control.
Licensing: In a licensing arrangement, one business firm, the licensor, makes certain resources or
"inputs" available to another business firm, the licensee. The availability of these inputs makes it possible
for the licensee to produce and market a product or service similar to that which the licensor has been
producing. As the goods are sold, or services rendered, a portion of the revenues, as specified by the
agreement, are sent to the licensor. Franchising is a form of licensing that has spread rapidly throughout
the world in recent years. The best-known and most successful international franchisors have been the
fast-food chains such as Kentucky Fried Chicken, Burger King, and McDonald's.
Advantages: 1) Low cost and 2) low risk.
Disadvantages: 1) The local firm in the host country may attempt to export the goods to another country,
which may reduce sales of the licensing corporation, 2) It is difficult to ensure quality control of the local
firm's production process, and 3) Technology secrets provided to the local firm may leak out to

competitive firms in that country.
Joint Venture: In the case of joint venture, two or many firms combine to create a subsidiary. Usually,
each firm provides the resources in which it has the advantage. For example, a corporation in a
developing country can combine with a US based MNC to gain technological advantages. The US firm, in
turn, gains a foothold in the country and gains a market share.
Impact of Foreign Opportunities on Firm Size
MNCs have cost advantages over domestic corporations, and, therefore, the cost of capital for MNCs is
cheaper than that for domestic corporations (DCs). Also, MNCs have greater opportunities for more
profitable projects; that is, the marginal rate of return from a project is higher for the MNC as opposed to
the DC. Besides, MNCs have additional opportunities. With higher return, lower cost, and additional
opportunities, an MNC is likely to attain a larger size compared to a DC.
Figure # 2 provides information on the marginal return and marginal cost for MNC and DC.
FIGURE 2
Note: This Figure is reproduced from permission from International Financial Management, Sixth Edition, Jeff Madura. Copyright © 2000 by
West Publishing Company. All Rights Reserved.
Note that the marginal return (MR) is higher, but the marginal cost of capital (MCC) is lower for a MNC
compared to a DC. The intersection of the MR and MCC curves determines the projects that will get
accepted. As long as the MR is greater than or equal to the MCC, the projects will be accepted.
Question: Do you know why the marginal cost of capital curve (MCC) is upward sloping?
The optimal size of an MNC will be determined by a variety of factors, such as the economic and political
environment of the foreign governments, MNC's product line, operating characteristics, risk-return
preference, and industry type, etc.
Risks of International Business
Exchange Rate Risk: Exchange Rate Risk is defined as the variability in home-country cash flows due to
the fluctuations in the host-country exchange rates. This risk can affect both the revenues and costs of an
MNC negatively. For example, consider the following example:
ABC Corporation (US based MNC) has DM 100 million in 90-day payables owed to a German firm for
imports from the firm. Suppose, the exchange rate right now (t=0) = $0.661 per DM. Based on this
exchange rate, ABC anticipated an outflow of $66.1 million. The exchange rate at t=+90 days when the
payable bill was paid, turned out to be $0.75 per DM.

Given:
ABC Corporation (US-based MNC) has DM 100 million in 90-day Payables
90-day Payables DM 100 Million
Time=t 0 Plus 90 days Extra Cost
Spot Exchange Rate $/DM 0.661 0.75
$ Cost 66.1 75 8.9
In this case, ABC Corporation paid $ 8.9 million more than it anticipated to pay at time=0; the DM
appreciated, thereby increasing the $ cost of the payables in DM. This is the exchange rate risk that the
MNCs face in handling their foreign currency flows. This risk arises from the need to convert the cash
flows from one currency to another. If there is no need to convert the currency, MNCs will not face
exchange rate risk.
Question for interactive table above
Please change the t=+90 days exchange rate from $0.75 per DM to:
1. $0.50 per DM
2. $1.00 per DM
What happens to the $ outflow cost in 1 and 2 above? Does what unfolds in scenario #1 above constitute
an exchange rate risk?
Question: If there were a single Currency through out the globe, MNCs would not face the daunting
problem of exchange rate risk. What do you think of this idea? Is it feasible? Could it create other
problems?
Political Risk: Some examples of political risk include: 1) nationalization or being taken-over without
receiving adequate compensation 2) Restrictions by host country governments on remittances to the
parent company, 3) Change in taxation policies in mid-stream.
In addition, the form of the government, its stability and the form of the legal system etc. will affect the
political risk of a country.
Business Risk: Business risk arises from host country business and economic conditions. Slowing or
weakening Japanese and European markets often leads to reduced demand for products of U.S. MNCs
in these markets, thereby, contributing to the business risk of the U. S. MNCs.
Summary
In this module, we learned about some features of the World of International Finance and we noted the

increasing globalization trend sweeping the markets. In addition, we looked at the characteristics of the
Multinational Corporation and its objective; in the context of the MNC, we discussed the theories of
international business: Theory of Comparative Advantage, Imperfect Markets Theory, and Product Cycle
Theory. In addition, we also compared and contrasted multinational corporations with purely domestic
corporations with regard to return and risk; it turns out that multinational corporations enjoy higher
possible returns, but they also face more risks.
Answers to Questions Raised in the Lecture
1. How does the objective of stock price or stockholder wealth maximization consider the time value
of money?
Stock price is the present value of all expected future cash flows of the corporation. Therefore,
maximizing stock price automatically considers the time value of money.
2. How does the objective of stock price or stockholder wealth maximization consider the riskiness
of cash flows as well?
In finding the present value of the cash flows to arrive at the stock price of the corporation,
depending on the riskiness of the cash flows, one can use different discount rates: if the risk is
higher, one can use a higher discount rate, and if the risk is lower, one can use a lower discount
rate. Thus, the objective of stock price maximization considers the riskiness of cash flows as well.
3. Are the three theories of international business complementary or competitive?
The three theories are more complementary rather than competitive. The three theories address
different dimensions of international business.
4. If there were a single currency throughout the globe, there would not be exchange rate risk. What
do you think about its feasibility ? What other problems could that create?
If we had a single currency, the sovereignty of each country as we know it today would be
violated. The ability of the Central Bank of each country to control monetary policy and affect
exchange rates, and inflation etc. would be affected as well. We are already witnessing these
kinds of problems with the European integration and its single currency ECU evolution.
5. Why is the marginal cost of capital (MCC) upward sloping?
If a corporation has debt in its capital structure, it is inherently risky, and, therefore, the banks will
be willing to lend additional money only at higher interest rates. That is why the MCC is upward
sloping.

END OF MODULE 1
Module 2: Foreign Exchange Markets
Objectives and Theme:
This segment introduces foreign exchange markets. The first objective here is to learn the characteristics
of Spot Markets and the Forward Markets; the second objective is to study the pricing of one currency
relative to another in terms of direct and indirect quotes. Thirdly, bid and ask prices are introduced and
explained. Finally, the concept of buying and selling currencies for future needs using Forward contracts,
Futures contracts, and Options are briefly explained.
Introduction:
Unlike stock markets, which have a physical location of their own, there is no one place where currencies
trade. In fact, currencies trade around the globe on a 24-hour basis. According to Zaheer (1995), the
foreign exchange market consists of:
1. a primary network of about 150 major international banks with 1000 affiliates spread around the
globe; these major banks act as market makers by buying and selling various currencies, and by
quoting two-way bid-ask prices all the time. These banks also do speculative trading based on
"privately informed opinion about market expectations of price trends."
2. a secondary network of 4000 or so second tier banks, which are involved both in speculative
trading and trading with customers.
3. tertiary network of corporations, central banks, fund managers, and customers. The participants
in this group buy and sell currencies essentially for their liquidity needs arising from trade and
investment transactions.
As of April 1998, the net turnover in the global foreign exchange market amounted to 1.5 trillion dollars a
day!
1
. This compares with a market turnover of $820 billion in 1992 and 590 billion in 1989, representing
an annual growth rate of 12 percent and 14 percent per year respectively. To understand the enormity of
this market, it would be helpful to know that the US annual real GDP is about 6.82 trillion dollars! London,
New York and Tokyo dominate the currency markets. The US dollar accounts for 83 percent of all global
foreign exchange transactions, followed by the German mark, which accounts for 30 percent of all
transactions, and the Japanese yen with a share of 24 percent of all transactions.

1
Bank for International Settlements: Central Bank Summary of Foreign Exchange and Derivatives Market
Activity, 1998
Need for Foreign Currencies
The need for foreign currency arises in the context of trade and investment needs of individuals,
corporations, governments, and open market operations of central banks.
Let us first consider a trade related foreign currency need. Consider for example, ABC Corporation, a US
based MNC, which has imported merchandise from a German firm; let us assume that these imports are
denominated in German marks. ABC Corporation has to resort to the foreign exchange market to buy the
German marks to pay for its imports. Similarly, XYZ Corporation located in London exported merchandise
to an Indian company; these exports are denominated in British pounds. The Indian importer has to buy
British pounds to pay for its imports.
Now, let us look at an investment based need for foreign currencies. If Japanese individuals and
institutional investors want to invest in US bond market securities like T-bills, and T-bonds etc., they need
to convert the home currency, the Japanese yen, to US dollars before they can invest in the US. Likewise,
if US individuals or institutional investors want to invest in Japanese stock markets, they have to convert
the US dollar to the Japanese yen to do so.
Foreign currency needs also arise for travel, education, and charitable giving needs, as well. For
example, if Korean nationals want to go to a US university for furthering their educations, they must
convert their Korean Won to US dollars to do so. Likewise, if someone from the US wants to travel in
London for entertainment and shopping, he or she has to pay for the trip in British pounds, and, therefore,
the US resident has to convert the US dollars to British pounds.
Spot Markets versus Forward Markets
In Spot transactions, currencies are bought and sold for immediate conversion and delivery. The market
where Spot transactions occur is called the Spot market. Currencies can also be bought and sold for
deferred delivery in the future. The markets where such deferred transactions occur are referred to as
Forward markets. Obviously, these markets are identified by the nature of transactions. In other words,
they do not trade in separate places ! You may wonder why anybody would want to buy or sell currencies
in the future. Buying and selling currencies in the future is done based on future foreign currency needs.
The prices at which currencies are bought and sold for spot transactions in the Spot markets are called

Spot prices, or quotes, while the prices at which currencies are bought and sold for future needs in the
forward markets are called Forward prices, or quotes.
Direct Quotes versus Indirect Quotes
There are two ways in which the price of one currency can be quoted relative to another currency. For the
US, the home currency is the US dollar; with respect to the US dollar, the two types of Quotes are:
1. Direct Quote, also called US $ Equivalent, refers to the # of units of US dollar per one unit of the
Foreign Currency. To understand the Direct Quote, please look at the table Currency Trading: Exchange
Rates. This table is a reproduction of Exchange Rate Quotes from the Wall Street Journal of February 8,
2001.
Table 2.1: Exchange Rate Quotes from WSJ, 2/8/2001
U.S. $ equiv.
Currency per U.S. $
Country
Thursday
2/8/2001
Wednesday
2/7/2001
Thursday
2/8/2001
Wednesday
2/7/2001
Argentina (Peso) 1.0001 1.0001 0.9999 0.9999
Australia (Dollar) 0.5352 0.5461 1.8686 1.8310
Austria (Schilling) 0.06675 0.06752 14.981 14.810
Bahrain (Dinar) 2.6525 2.6525 0.3770 0.3770
Belgium (Franc) 0.0228 0.0230 43.917 43.416
Brazil (Real) 0.5021 0.4994 1.9915 2.0025
Britain (Pound) 1.4445 1.4545 0.6923 0.6875
1-month forward 1.4443 1.4543 0.6924 0.6876
3-months forward 1.4435 1.4535 0.6928 0.6880

6-months forward 1.4422 1.4523 0.6934 0.6886
Canada (Dollar) 0.6618 0.6627 1.5110 1.5090
1-month forward 0.6619 0.6627 1.5108 1.5089
3-months forward 0.6620 0.6629 1.5105 1.5085
6-months forward 0.6623 0.6632 1.5098 1.5079
Chile (Peso) 0.001787 0.001778 559.65 562.35
China (Renminbi) 0.1208 0.1208 8.2763 8.2765
Colombia (Peso) 0.0004455 0.0004461 2244.50 2241.88
Czech. Rep. (Koruna) 0.02656 0.02682 37.652 37.288
Denmark (Krone) 0.1231 0.1251 8.1245 7.9920
Ecuador (US Dollar) -e 1.0000 1.0000 1.0000 1.0000
Finland (Markka) 0.1545 0.1563 6.4730 6.3991
France (Franc) 0.1400 0.1416 7.1412 7.0598
1-month forward 0.1401 0.1417 7.1370 7.0555
3-months forward 0.1403 0.1419 7.1300 7.0486
6-months forward 0.1404 0.1421 7.1211 7.0396
Germany (Mark) 0.4696 0.4751 2.1293 2.1050
1-month forward 0.4699 0.4754 2.1280 2.1037
3-months forward 0.4704 0.4758 2.1259 2.1016
6-months forward 0.4710 0.4764 2.1233 2.0990
Greece (Drachma) 0.002696 0.002727 370.87 366.73
Hong Kong (Dollar) 0.1282 0.1282 7.7994 7.7999
Hungary (Forint) 0.003460 0.003501 289.01 285.63
India (Rupee) 0.02155 0.02155 46.405 46.400
Indonesia (Rupiah) 0.0001036 0.0001036 9651.00 9651.00
Ireland (Punt) 1.1663 1.1798 0.8574 0.8476
Israel (Shekel) 0.2420 0.2416 4.1330 4.1396
Italy (Lira) 0.0004744 0.0004799 2107.96 2083.92
Japan (Yen) 0.008572 0.008596 116.66 116.33
1-month forward 0.008607 0.008631 116.19 115.86

3-months forward 0.008678 0.008701 115.23 114.93
6-months forward 0.008781 0.008805 113.89 113.57
Jordan (Dinar) 1.4065 1.4065 0.7110 0.7110
Kuwait (Dinar) 3.2616 3.2680 0.3066 0.3060
Lebanon (Pound) 0.0006605 0.0006605 1514.00 1514.00
Malaysia (Ringgit-b) 0.2632 0.2632 3.8000 3.8000
Malta (Lira) 2.2589 2.2758 0.4427 0.4394
Mexico (Peso) Float 0.1033 0.1033 9.6835 9.6835
Netherland (Guilder) 0.4168 0.4216 2.3991 2.3717
New Zealand (Dollar) 0.4351 0.4442 2.2983 2.2512
Norway (Krone) 0.1125 0.1137 8.8873 8.7955
Pakistan (Rupee) 0.01695 0.01698 59.000 58.895
Peru (new Sol) 0.2833 0.2831 3.5303 3.5320
Philippines (Peso) 0.02075 0.02060 48.200 48.550
Poland (Zloty) [d] 0.2431 0.2468 4.1135 4.0520
Portugal (Escudo) 0.004582 0.004635 218.26 215.77
Russia (Ruble) [a] 0.03501 0.03509 28.562 28.497
Saudi Arabia (Riyal) 0.2666 0.2666 3.7506 3.7506
Singapore (Dollar) 0.5722 0.5720 1.7475 1.7483
Slovak Rep. (Koruna) 0.02106 0.02125 47.483 47.059
South Africa (Rand) 0.1252 0.1267 7.9850 7.8900
South Korea (Won) 0.0007899 0.0007915 1266.00 1263.50
Spain (Peseta) 0.005521 0.005584 181.14 179.07
Sweden (Krona) 0.1035 0.1047 9.6610 9.5550
Switzerland (Franc) 0.5988 0.6047 1.6700 1.6536
1-month forward 0.5998 0.6057 1.6673 1.6510
3-months forward 0.6016 0.6076 1.6622 1.6459
6-months forward 0.6042 0.6102 1.6550 1.6387
Taiwan (Dollar) 0.03104 0.03104 32.220 32.220
Thailand (Baht) 0.02346 0.02343 42.620 42.685

Turkey (Lira) 0.00000147 0.00000147 682170.00 678130.00
United Arab (Dirham) 0.2723 0.2723 3.6730 3.6730
Uruguay (New Peso) Financial 0.07957 0.07958 12.568 12.566
Venezuela (Bolivar) 0.001425 0.001426 701.75 701.51
SDR 1.2932 1.2990 0.7733 0.7698
Euro 0.9186 0.9292 1.0886 1.0762
1. The quotes are given for Wednesday, February 7th and Thursday, February 8th. In the first column, the
country name appears. In the second and third columns, US $ Equivalents, or Direct Quotes are given.
Let us consider Germany (Mark): The very first line for Germany represents the Spot quote. Recall that
Spot quotes represent the prices quoted for immediate conversion and delivery. The Quote of 0.4696 in
US $ Equivalent for Thursday translates to US $ 0.4696 per Mark. This means one Mark equals US $
0.4696. Likewise, the quote of 0.4751 in US $ Equivalent for Wednesday should be read as US $0.4751
per Mark. For another example, let us examine the French Franc. Once again, the very first line for that
country represents the Spot Quote. Whenever a given country quote appears more than once, the very
first line always represents the Spot Quote. A quote of 0.1400 for France on Thursday should be read as
US $ 0.1400 per French Franc. This means one French Franc is worth 0.1400 US dollar. Likewise,
considering the Direct Quotes for the British pound, a quote of US $ Equivalent of 1.4445 on Thursday
should be read as US $ 1.4445 per British pound. This means one British pound equals US $ 1.4445.
2. The Indirect Quotes are presented in columns 4 and 5 of the Currency Trading: Exchange Rates table,
under the heading Currency per US $. Once again, consider the Spot Quotes for Germany. The quote of
2.1293 appearing across Germany (Marks) for Thursday under column 4 should be read as 2.1293 Mark
(DM) per US dollar: this means one US dollar is worth 2.1293 DMs. The indirect quote of 2.1050 of the
DM for Wednesday, read as 2.1050 DMs per US dollar, translates into a value of 2.1050 DMs for one US
dollar. In a similar fashion, the indirect Thursday quote of 7.1412 for France, read as Franc (FF)
7.1412/US$, means one US $ is worth 7.1412 French Francs. A quote of 7.0598 for the FF on
Wednesday means that one US $ is worth 7.0598 FF. For the British pound, the Thursday Indirect Quote
is 0.6923, read as BP 0.6923 per US $, implying one US $ equals BP 0.6923.
Given a Direct Quote, one can get the Indirect Quote by taking the reciprocal of the Direct Quote and
vice-versa. For example, we already know that the Direct Quote for the Mark on Thursday is 0.4696; if we
take 1/0.4696, we get 2.1293, the Indirect Quote of the Mark for Thursday. Similarly, if we take the

reciprocal of the Indirect Quote of the FF for Thursday: 1/7.1412, we get 0.1400 , the Direct Quote for FF
for the same day
The World Value of the US Dollar
The World Value of the US dollar for several global currencies are presented below. Source: Wall Street
Journal, February 16, 2001.
Table 2.2: World Value of the US Dollar from WSJ, 2/16/2001
Country Currency 2/16 2/9
Afghanistan Afghani 4750.00 4750.00
Albania Lek 143.00 142.70
Algeria Dinar 73.93 74.00
Andorra Peseta 181.3175 181.0866
Andorra Franc 7.1482 7.1391
Angola Readj Kwanza 18.2458 18.2458
Antigua E Caribbean $ 2.70 2.70
Argentina Peso 1.00 1.00
Armenia Dram 552.18 553.97
Aruba Florin 1.79 1.79
Australia Australia $ 1.8948 1.8645
Austria Schilling 14.9952 14.9761
Azerbaijan Manat 4558.00 4558.00
Bahamas Dollar 1.00 1.00
Bahrain Dinar 0.377 0.377
Bangladesh Taka 54.10 54.13
Barbados Dollar 2.00 2.00
Belarus Ruble 1210.00 1210.00
Belgium Franc 43.96 43.904
Belize Dollar 2.00 2.00
Benin C.F.A. Franc 714.8226 713.9124
Bermuda Dollar 1.00 1.00
Bhutan Ngultrum 46.515 46.4575

Bolivia Boliviano 6.43 6.395
Bolivia Boliviano 6.07 6.07
Bosnia Herzegovina Convtbl Mark 2.1314 2.1286
Botswana Pula 5.5233 5.5556
Bouvet Island Norweg. Krone 9.0083 8.8631
Brazil Real 1.9885 1.9905
Brunei Dollar 1.7409 1.7485
Bulgaria Lev 2.14 2.1195
Burkina Faso C.F.A. Franc 714.8226 713.9124
Burma Kyat 6.5899 6.5949
Burundi Franc 734.067 734.063
Cambodia Riel 3835.00 3835.00
Cameroon C.F.A. Franc 714.8226 713.9124
Canada Dollar 1.5334 1.5099
Cape Verde Isl Escudo 119.984 119.989
Cayman Islands Dollar 0.82 0.82
Centrl African Rp C.F.A. Franc 714.8226 713.9124
Chad C.F.A. Franc 714.8226 713.9124
Chile Peso 518.37 518.37
Chile Peso 562.825 559.95
China Renminbi Yuan 8.277 8.2764
Colombia Peso 2238.50 2242.00
Commnwlth Ind Sts Rouble 28.688 28.671
Comoros Franc 536.117 535.4343
Congo Dem Rep Congolese Fr 4.4999 4.4999
Congo, People Rp C.F.A. Franc 714.8226 713.9124
Costa Rica Colon 321.13 320.68
Croatia Kuna 8.489 8.3718
Cuba Peso 1.00 1.00
Cyprus Pound * 1.5703 1.5902

Czech Koruna 37.833 37.575
Denmark Danish Krone 8.2005 8.0943
Djibouti DjiboutiFranc 173.00 175.50
Dominica E Caribbean $ 2.70 2.70
Dominican Rep Peso 16.30 16.30
Ecuador Sucre 25000.00 25000.00
Egypt Pound 3.8843 3.8843
El Salvador Colon 8.75 8.75
Equatorial Guinea C.F.A. Franc 714.8226 713.9124
Estonia Kroon 17.1866 16.9777
Ethiopia Birr 8.10 8.25
Euro Monetary Union EURO * 0.9177 0.9188
Faeroe Islands Danish Krone 8.2005 8.0943
Falkland Islands Pound * 1.4541 1.4449
Fiji Dollar 2.2346 2.2284
Finland Markka 6.4793 6.4711
France Franc 7.1482 7.1391
French Guiana Franc 7.1482 7.1391
French Pacific Isl C.F.P. Franc 129.9676 129.8021
Gabon C.F.A. Franc 714.8226 713.9124
Gambia Dalasi 15.40 15.40
Georgia Lari 1.97 1.967
Germany Mark 2.1314 2.1286
Ghana Cedi 7300.00 7100.00
Gibraltar Pound * 1.4541 1.4449
Greece Drachma 371.3289 369.64
Greenland Danish Krone 8.2005 8.0943
Grenada E Caribbean $ 2.70 2.70
Guadeloupe Franc 7.1482 7.1391
Guam U.S. $ 1.00 1.00

Guatemala Quetzal 7.8065 7.8215
Guinea Bissau C.F.A. Franc 714.8226 713.9124
Guinea Rep Franc 1865.00 1865.00
Guyana Dollar 180.50 180.50
Haiti Gourde 23.00 23.00
Honduras Rep Lempira 15.19 15.19
Hong Kong Dollar 7.7997 7.7992
Hungary Forint 291.815 288.04
Iceland Krona 86.40 85.91
India Rupee 46.515 46.4575
Indonesia Rupiah 9600.00 9650.09
Iran Rial 1752.50 1752.50
Iraq Dinar 0.3124 0.3124
Ireland Punt * 1.1652 1.1667
Israel New Shekel 4.106 4.118
Italy Lira 2110.0311 2107.3442
Ivory Coast C.F.A. Franc 714.8226 713.9124
Jamaica Dollar 45.20 45.20
Japan Yen 116.468 116.683
Jordan Dinar 0.711 0.711
Kazakhstan Tenge 145.35 145.35
Kenya Shilling 78.285 78.06
Kiribati Australia $ 1.8948 1.8645
Korea, North Won 2.20 2.20
Korea, South Won 1251.50 1266.00
Kuwait Dinar 0.3066 0.3067
Kyrgyzstan Som 48.304 49.221
Laos, People DR Kip 7600.00 7600.00
Latvia Lat 0.6199 0.6209
Lebanon Pound 1514.25 1514.00

Lesotho Maloti 7.8863 7.95
Liberia Dollar 1.00 1.00
Libya Dinar 0.5357 0.5357
Liechtenstein Franc 1.687 1.6649
Lithuania Litas 3.999 3.9991
Luxembourg Lux.Franc 43.96 43.904
Macao Pataca 8.0571 8.0566
Madagascar DR Franc 6400.00 6400.00
Malawi Kwacha 80.30 80.80
Malaysia Ringgit 3.80 3.80
Maldive Rufiyaa 11.77 11.77
Mali Rep C.F.A. Franc 714.8226 713.9124
Malta Lira * 2.2456 2.2571
Martinique Franc 7.1482 7.1391
Mauritania Ouguiya 251.695 250.70
Mauritius Rupee 27.985 27.975
Mexico New Peso 9.7005 9.684
Moldova Lei 12.3833 12.3436
Monaco Franc 7.1482 7.1391
Mongolia Tugrik 1063.00 1099.00
Montserrat E Caribbean $ 2.70 2.70
Morocco Dirham 10.7625 10.6995
Mozambique Metical 16900.00 17050.00
Namibia Dollar 7.862 7.9675
Nauru Islands Australia $ 1.8948 1.8645
Nepal Rupee 74.4677 74.1637
Netherlands Guilder 2.4015 2.3984
Netherlands Ant'les Guilder 1.79 1.79
Netherlands Ant'les Florin 1.79 1.79
New Zealand N.Z.Dollar 2.3345 2.2991

Nicaragua Gold Cordoba 12.90 12.90
Niger Rep C.F.A. Franc 714.8226 713.9124
Nigeria Naira 111.50 111.80
Norway Norweg. Krone 9.0083 8.8631
Oman, Sultanate of Rial 0.385 0.385
Pakistan Rupee 59.5125 59.195
Panama Balboa 1.00 1.00
Papua N.G. Kina 3.1496 3.0628
Paraguay Guarani 3700.00 3670.00
Peru New Sol 3.5268 3.5303
Philippines Peso 48.00 48.20
Pitcairn Island N.Z.Dollar 2.3345 2.2991
Poland Zloty 4.1005 4.108
Portugal Escudo 218.4733 218.1951
Puerto Rico U.S. $ 1.00 1.00
Qatar Riyal 3.6408 3.6408
Repub of Macedonia Denar 64.045 64.045
Republic of Yemen Rial 161.458 161.458
Reunion, Ile de la Franc 7.1482 7.1391
Romania Leu 26864.00 26722.50
Russia Rouble 28.688 28.671
Rwanda Franc 359.0281 359.0281
Saint Christopher E Caribbean $ 2.70 2.70
Saint Helena Pound Sterling * 1.4541 1.4449
Saint Lucia E Caribbean $ 2.70 2.70
Saint Pierre Franc 7.1482 7.1391
Saint Vincent E Caribbean $ 2.70 2.70
Samoa, American U.S. $ 1.00 1.00
Samoa, Western Tala 3.3478 3.3478
San Marino Lira 2110.0311 2107.3442

Sao Tome & Principe Dobra 2390.98 2390.98
Saudi Arabia Riyal 3.7504 3.7504
Senegal C.F.A. Franc 714.8226 713.9124
Seychelles Rupee 6.49 6.45
Sierra Leone Leone 1899.095 1899.095
Singapore Dollar 1.7409 1.7485
Slovak Koruna 48.017 47.3125
Slovenia Tolar 236.81 233.89
Solomon Islands Solomon $ 5.1099 5.1099
Somali Rep Shilling 2620.00 2620.00
South Africa Rand 7.8863 7.95
Spain Peseta 181.3175 181.0866
Sri Lanka Rupee 86.09 86.81
Sudan Rep Dinar 256.00 256.00
Sudan Rep Pound 2560.00 2560.00
Surinam Guilder 981.00 981.00
Swaziland Lilangeni 7.8863 7.95
Sweden Krona 9.841 9.663
Switzerland Franc 1.687 1.6649
Syria Pound 52.7064 52.7064
Taiwan Dollar 32.274 32.285
Tanzania Shilling 815.50 812.00
Thailand Baht 42.465 42.595
Togo, Rep C.F.A. Franc 714.8226 713.9124
Tonga Islands Pa'anga 2.0101 2.0096
Trinidad & Tobago Dollar 6.22 6.24
Tunisia Dinar 1.3949 1.3878
Turkey Lira 686255.00 681280.00
Turks & Caicos U.S. $ 1.00 1.00
Tuvalu Australia $ 1.8948 1.8645

Uganda Shilling 1815.00 1815.00
Ukraine Hryvnia 5.4289 5.4298
United Arab Emir Dirham 3.6729 3.6729
United Kingdom Pound Sterling * 1.4541 1.4449
Uruguay Peso Uruguayo 11.3925 11.3925
Uzbekistan Sum 775.00 775.00
Vanuatu Vatu 141.80 141.80
Vatican City Lira 2110.0311 2107.3442
Venezuela Bolivar 702.90 701.75
Vietnam Dong 14582.50 14578.00
Virgin Is, Br U.S. $ 1.00 1.00
Virgin Is, US U.S. $ 1.00 1.00
Yugoslavia New Dinar 64.4696 63.6537
Zambia Kwacha 3675.00 3525.00
Zimbabwe Dollar 55.10 55.00
The rates given are in terms of # of Units of Foreign Currency per one US dollar. The values are given for
two different dates: one for Friday, February 16th, and another for Friday, February 9th, 2001. For
example, for the South Korean Won, the rate given for February 16th is 1251.50, which should be read as
South Korean Won 1251.50 per one US dollar. Please note the fact that this quote is in indirect form. Can
you compare the value of South Korean Won on February 16th with its value on February 9th, and figure
out whether or not the Won appreciated or depreciated with respect to the US $? Remember to use direct
quotes to do that; you can get the direct quotes for the Won by taking the reciprocals of the indirect
quotes in this table.
Further, take a few minutes to read and learn the currencies of the countries around the globe! Do you
know the name of the Currency for Reunion, Ille de la? Or for that matter, can you name the currencies
for Algeria, Bolivia, Chile, Denmark, Egypt, Finland, Germany, Holland, India, Jordan, Kenya, Libya,
Madagascar, Nepal, Oman, Panama, Qatar, Singapore, Taiwan, Uganda, Vatican City, and Zaire?
By visiting the Foreign Exchange Rates site, you can convert one currency to another currency using the
latest quotes. Be sure to visit the site.
Can you tell me the value or price of the Indian Rupee in terms of South Korean Won? That is, figure out

how many Won equal one Indian Rupee? Then, get the value of South Korean Won in Rupees. That is,
get the value of # of Indian Rupees per South Korean Won
Computing Percent Change for a Foreign Currency
One can compute the Percent Change for a currency as follows:
Percentage Change for a Currency = (S
t
- S
t-1
) / S
t-1
* 100 ,
Where,
S
t
= Spot Rate for more recent period t,
S
t-1
= Spot Rate for last period t-1.
If percent change were positive, then it implies appreciation of the currency over time; and,
If percent change were negative, then it implies depreciation of the currency over time.
In computing the percent change for a foreign currency from the US perspective, always use the direct
quote. Let us compute the percent change for the DM from Wednesday (t
-1
) to Thursday (t) :
Percent change in DM from Wednesday to Thursday from the WSJ (Table 2.1) =
[(0.4696-0.4751) / 0.4751] * 100 = -1.1577 percent.
This means, the DM depreciated by 1.1577 percent with respect to the US $, over a one day period.
If we were to compute the percent change in the US $ with respect to the DM for the same period, we
should be using the indirect quotes for the same period:
Percent change in the US $ with respect to the Mark from Wednesday to Thursday =

[(2.1293-2.1050) / 2.1050] * 100 = + 1.1544 percent.
Bid, Ask Prices, and Bid / Ask Percent Spread
At any given point in time, there are two separate prices quoted for currencies: one for buying and the
other for selling. Every time you buy a given currency, its buying price is always greater than its asking
price. Every time the currencies are bought and sold, the foreign exchange dealers make a profit. The bid
and ask prices are further explained below:
BID-ASK PRICES
Foreign Currency Bank Quotation
You/MNC
Bank/Foreign
Exchange Dealer
Buy Sells Ask = Mininum price the bank will accept for the currency in question
Sell Buys Bid = Maximum price the bank will pay for the currency in question
Suppose for example, the following are the Bid, Ask Prices quoted for the Mark:
Bid = $ 0.4664/DM
Ask= $ 0.4724/DM
If you want to purchase 100 Marks, it will cost you:
Ask Price * # of Marks being bought = 0.4724 * 100 = US $ 47.24
If you want to sell 100 marks, you will receive =
Bid price of 0.4664 * # Marks being bought = US $ 46.64
The Bid/Ask Percent Spread is given by:
[ (Ask - Bid) / Ask ] * 100 = [(0.4724 - 0.4664)/0.4724] * 100 = 1.2701 percent.
This should be read as the Ask price being at a premium of 1.2701 percent with respect to the Bid price.
Obviously, one can compute the discount with respect to the Ask price, by dividing by the Bid price. It is
customary to express the Bid/Ask Percent spread as a premium with respect to the Bid Price
Cross Exchange Rates
Given the value of any two currencies in terms of the US dollar, one can calculate the value of those two
currencies with respect to one another without the intervening dollar. Important Cross Currency Rates are
given below:
Key Currency Cross Rates

Wall Street Journal, February 08, 2001
Dollar Euro Pound SFranc Guilder Peso Yen Lira D-Mark FFranc CdnDlr
Canada 1.5110 1.3880 2.1826 0.9048 .62982 .15604 .01295 .00072 .70962 .21159
France 7.1412 6.5599 10.3155 4.2762 2.9766 .73746 .06121 .00339 3.3538 4.7261
Germany 2.1293 1.9560 3.0758 1.2750 .88754 .21989 .01825 .00101 .29817 1.4092
Italy 2108.0 1936.4 3045.0 1262.3 878.65 217.69 18.069 989.98 295.18 1395.1
Japan 116.66 107.16 168.52 69.856 48.627 12.047 .05534 54.788 16.336 77.207
Mexico 9.6835 8.8953 13.988 5.7985 4.0363 .08301 .00459 4.5477 1.3560 6.4087
Netherlands 2.3991 2.2038 3.4655 1.4366 .24775 .02056 .00114 1.1267 .33595 1.5878
Switzerland 1.67 1.5341 2.4123 .69609 .17246 .01432 .00079 .78430 .23385 1.1052
U.K. .69230 .6359 .4145 .28856 .07149 .00593 .00033 .32512 .09694 .45816
Euro 1.08860 1.5725 .65186 .45376 .11242 .00933 .00052 .51125 .15244 .72046
U.S. .9186 1.4445 .59880 .41682 .10327 .00857 .00047 .46964 .14003 .66181
The very first column refers to the US dollar. If we read across France and down the Dollar column, the
value given is 7.1412; this should be read as FF 7.1412 per US dollar. Likewise, if we read across
Germany and down the Dollar column, the quote given is 2.1293; this should be read as Marks 2.1293
per US dollar. Both the FF and DM are in indirect form.
The value of DM in terms of FF, that is the # of FFs per DM is calculated as:
[FF / US $] : [DM / US $] = 7.1412 / 2.1293= FF 3.3538 per DM
= [FF / US $] * [US $ / DM] = FF / DM !
If we refer to the Currency Cross Rates Table and look across France and down D-Mark, you will see a
Cross Exchange Rate of 3.3538, the same rate we calculated just now!
To look at yet another example of the cross exchange rate, let us examine the rates for Germany and
U.K. If we look across Germany and down the Dollar column, we note a quote of 2.1293, which stands for
DM 2.1293 per US dollar. Likewise, for the pound the rate is 0.69230, which should be read as 0.69230
pound per US dollar. The cross exchange rate of the pound with respect to DM, that is, # of DMs per
pound, is calculated as:
2.1293 / 0.69230 = Marks 3.0758 per pound
If we look across Germany and down Pound in Table 5, we get the value of 3.0758 DMs per pound as
well, the same # as we calculated just now.

In these Cross Exchange Rate computations, we used Indirect Quotes. Note the fact that the order in
which the currencies are plugged in the numerator and denominator to arrive at the cross exchange rate
is in the same order as the currencies appear in the pricing of currencies. However, if we are using the
Direct Quotes, the order of currencies in the numerator and denominator will be reversed.
Currency Forward Contracts, Forward Rates, and Forward Premium
The currencies can be bought and sold in Forward Markets. The Forward Rate is the rate at which
currencies are bought or sold for future delivery at an agreed upon price today. The currency exchange
does not take place when the contract is bought or sold. Rather, the exchange occurs later. Often, MNCs
face future foreign currency outflow needs or receive foreign currency inflows in the future. When MNCs
expect future outflow needs like Bills Payable, they can buy the foreign currency at t=0 at the then
prevailing forward rate and lock-in that rate, thereby avoiding the exchange rate risk. A forward contract
specifies the foreign currency to be bought or sold at a specified known rate today for a future settlement
date.
Forward rates for some currencies appear in Table 2.1. The most common maturities are 30-day, 90-day,
and 180-day. For the British pound (BP), the quoted 30-day forward rate is British pound 1.4443 per US
dollar; the 90-day and 180-day forward rates are BP 1.4435 per US $ and BP 1.4422 per US $,
respectively. The spot rate is 1.4445 US $ per BP. In this instance, all the three forward rates are below
the spot rate, and therefore, forward market rates are at a discount with respect to the spot market rates.
We can calculate the Forward Market Premium or Discount P as follows:
P = Forward Market Premium or Discount Percent =
= [( Forward - Spot) / Spot ] * (360/# of Days of the Contract) * 100
The multiplier (360/# of Days of the Contract) converts the P to an annual rate !
For example, the P for the 30-Day BP Rate will be computed as follows:
[ (1.4443-1.4445) / 1.4445 ] * (360/30)* 100 = -0.1661 %
The premium of - 0.1661 percent means that the 30-day forward rate is at a discount of 0.1661 percent
with respect to the spot rate.
Similarly, the Premium P for the BP 90-day and 180-day forward rates will be computed as :
Premium for 90-day forward rate:
[ (1.4435-1.4445) / 1.4445] * (360/90) * 100 = -0.2769 %
Premium for 180-day forward Rate:

= [ (1.4422-1.4445) / 1.4445] * (360/180) * 100 = -0.3184 %
In some sense, forward rates convey information about the spot rates in the future. Under certain
conditions and assumptions, forward rates can act as predictors of spot rates in the future.
Currency Futures
Currency Futures are legal contracts which enable individuals, institutions, and MNCs to buy or sell
currencies in the future at a specific price and for a specific period of time.
Currency futures are available in the Chicago Mercantile Exchange for the Japanese Yen, DMark,
Canadian Dollar, British Pound, Swiss Franc, Australian Dollar, Mexican Peso, and Euro. Unlike the
Forward contacts, these futures are standardized with respect to size and delivery. These futures are
used in hedging and speculation. We will learn more about these futures in Module 5.
Can you visit the Chicago Mercantile Exchange and find out what futures are and options are currently
traded at the exchange? Who trades them? And why?
Currency Options
Currency options are rights which enable individuals, institutions, and MNCs to buy and sell currencies in
the future at a specific price for a specified period of time. These options are available for various
currencies and trade in the Philadelphia Exchange. These options can be used for hedging and
speculation. We will learn a lot about these instruments later in Module 5.
Please visit the Introduction to Options site: Learn about Options Basics. Also, learn about the
classification types, classes, and series!
So, what are European Options? And what are American Options? What are calls, and what are puts?
Summary: In this module, we learned about the pricing of foreign currencies; the currencies can be
quoted in direct form as # of US $ per one unit of foreign currency and in indirect form as # of units of
foreign currency per US $. We also learned about the ask and bid prices: the prices at which currencies
are bought and sold, respectively. There was a discussion on computing percent change of a given
currency. Also, we studied forward contracts and forward rates; forward rates are the rates at which
contracts are entered into to buy and sell currencies in the future to meet future needs.
Questions and Problems
1. State and explain the right objective for a multinational corporation. What are the advantages of
that objective?
2. What is an agency problem? What are agency costs? Are they higher or lower for MNCs ? And

why?
3. State and explain the three theories of international business.
4. State and explain the different methods of international business.
5. What is exchange rate risk? Illustrate your answer with a suitable example. Why is it important to
manage it for an MNC?
6. Distinguish between spot and forward foreign currency markets.
7. Identify the participants in the foreign exchange market and explain their roles.
8. What is the difference between direct and indirect quotes? If you were to compute the percent
change in a foreign currency, which quote would you use and why?
9. Define forward markets and forward rates.
10. For what purposes and needs do the foreign exchange markets serve? Give suitable examples.
11. What do bid and ask prices mean? Which is higher? And why?