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【正文】 rnment securities ? LIBOR: the London Interbank Offer Rate is the rate most international banks charge one another for loans of Eurodollars overnight in the London market 315 Foreign Exchange Markets and Exchange Rates ? Without a doubt, the foreign exchange market is the world’s largest financial market. ? In this market, one country’s currency is traded for another’s. ? Most of the trading takes place in a few currencies: ? . dollar ($) ? British pound sterling (163。 and 165。International Corporate Finance Chapter 31 Copyright 169。 2021 by the McGrawHill Companies, Inc. All rights reserved. McGrawHill/Irwin 311 Key Concepts and Skills ? Understand how exchange rates are quoted and what they mean ? Know the difference between spot and forward rates ? Understand purchasing power parity and interest rate parity and the implications for changes in exchange rates ? Understand the basics of international capital budgeting ? Understand the impact of political risk on international business investing 312 Chapter Outline Terminology Foreign Exchange Markets and Exchange Rates Purchasing Power Parity Interest Rate Parity, Unbiased Forward Rates, and the International Fisher Effect International Capital Budgeting Exchange Rate Risk Political Risk 313 Terminology ? American Depository Receipt (ADR): a security issued in the . to represent shares of a foreign stock ? Cross rate: the exchange rate between two foreign currencies, ., the exchange rate between 163。 ? Euro (€): the single currency of the European Moary Union which was adopted by 11 Member States on 1 January 1999. These member states were: Belgium, Germany, Spain, France, Ireland, Italy, Luxemburg, Finland, Austria, Portugal and the Netherlands 314 Terminology ? Eurocurrency: money deposited in a financial center outside the home country. Eurodollars are dollar deposits held outside the .。) ? Japanese yen (165。(0) = 100 ? ., $1 = 165。 cross rate be? ,$165。 s in c e DMDM ???0 D M 1o r . 0 2 )0(?011$2? 0 01$165。/ ???????DMSDMDMDM3110 Triangular Arbitrage $ 163。 Credit Lyonnais S163。/163。(0) = 120 Suppose we observe these banks posting these exchange rates. First calculate the implied cross rates to see if an arbitrage exists. 3111 Triangular Arbitrage $ 163。 Credit Lyonnais S163。/163。(0) = 120 The implied S(165。) cross rate is S(165。) = 80 Credit Agricole has posted a quote of S(165。)=85, so there is an arbitrage opportunity. So, how can we make money? 163。120 = 163。80 3112 Triangular Arbitrage $ 163。 Credit Lyonnais S163。/163。(0) =120 As easy as 1 – 2 – 3: 1. Sell our $ for 163。 for 165。 for $. 3113 Triangular Arbitrage
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