This document discusses foreign currency markets and exchange rates. It defines key terms like spot rates, which are exchange rates for immediate delivery, and forward rates, which are for future delivery. It also covers factors that influence exchange rates like supply and demand. Additionally, it discusses how governments and companies can manage foreign exchange risk through tools like forward contracts, limiting foreign currency exposures, and diversification.

1. INTERACTION IN
FOREIGN CURRENCY
MARKETS

2. Exchange Rate Determination
exchange rates are determined by the supply of
and demand for the currencies.
Fixed Rate Exchange
the government determines the exchange
rate for a period of time based on the value of
another country’s currency such as dollar.

3. Trade deficit
a greater quantity of peso is supplied b y Philippine interests
than demanded by foreign interest (Imports exceeds Exports)
Trade surplus
a smaller quantity of peso is supplied b y Philippine interests
than demanded by foreign interest (Exports exceeds Imports)

4. Manage float (Manage Exchange Rate)
the government intervenes in the market to
influence the exchange rate or set the rate for short
periods such as a day or week.

5. SPOT RATES AND FORWARD RATES
Spot rate for a currency is the
exchange rate at which the currency is
traded for immediate delivery.
Forward rate for a currency is
the exchange rate at which the
currency for future delivery.

6. Forward
premium
(discount)
=
Forward rate – spot rate
Spot rate
x
12
Length of forward
contract (in
months)
x 100

7. Cross Rates
The currency exchange rate between two
currencies, both of which are not official
currencies of the country in which the exchange
rate quote is given in.

8. MANAGING FOREIGN
EXCHANGE RISK
Foreign Exchange Risk refers to the possibility of
a drop in revenue or an increase in cost in an
international transaction due to a change in foreign
exchange rates.
Exchange rate is a rate at which one currency
unit is converted into another.

9. AVOIDANCE OF EXCHANGE RATE
RISK IN FOREIGN CURRENCY
MARKETS
• The firm may limit its risk by purchasing or selling
forward exchange contracts
• The firm may choose to minimize receivables and
liabilities denominate in foreign currencies.
• Maintaining monetary balance between receivables
and payables denominated in particular currency

10. •Trigger pricing
• Diversification.
• Limiting the forward exchange markets, money
market and currency future markets.