Study Notes: Foreign Exchange Markets

Chapter 9. Foreign Exchange Markets Study Notes contain 23 pages covering the following learning objectives:

* Explain and describe the mechanics of spot quotes, forward quotes, and futures quotes in the foreign exchange markets, and distinguish between bid and ask exchange rates.
* Calculate bid-ask spread and explain why the bid-ask spread for spot quotes may be different from the bid-ask spread for forward quotes.
* Compare outright (forward) and swap transactions.
* Define, compare, and contrast transaction risk, translation risk, and economic risk.
* Describe examples of transaction, translation, and economic risks, and explain how to hedge these risks.
* Describe the rationale for multi-currency hedging using options.
* Identify and explain the factors that determine exchange rates.
* Calculate and explain the effect of an appreciation/depreciation of a currency relative to a foreign currency.
* Explain the purchasing power parity theorem and use this theorem to calculate the appreciation or depreciation of a foreign currency.
* Describe the relationship between nominal and real interest rates.
* Describe how a non-arbitrage assumption in the foreign exchange markets leads to the interest rate parity theorem, and use this theorem to calculate forward foreign exchange rates.
* Distinguish between covered and uncovered interest rate parity conditions.

After reviewing the notes, you will be able to apply what you learned with practice questions.

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