1. International Economics
11/11/61
Session 18
Forward Exchange and International Financial Investment
Aj. Noom Tel

2. Negotiate to buy goods today Agreement bases on paying in dollar
Exchange Rate Risk
25 Bath/ 1 dollar
Negotiate to buy goods today
U.S Exporter
Thai Importer
Agreement bases on paying in dollar
Goods
Money
What would happen if the money will be paid in the next 3 months by using the spot rate on the due date ?
Could . “Lost” (i.e. if 26 Bath/ 1 dollar)

3. Negotiate to buy goods today Agreement bases on paying in bath
25 Bath/ 1 dollar
Negotiate to buy goods today
U.S Exporter
Thai Importer
Agreement bases on paying in bath
Goods
Money
What would happen if the money will be paid in the next 3 months by using the spot rate on the due date ?
Could . “Lost” (i.e. if 24 Bath/ 1 dollar)

4. Basic Approach to Avoid Exchange Rate Risk
Bank
Borrow the money (Thai Baht)
Interest
Difference = Importer lost
Bank
Deposit in dollar
Interest
Sometimes in the future
Exchange “Baht” to “Dollar”
U.S Exporter
Thai Importer
Negotiate to buy goods today
Agreement bases on paying in dollar

5. Thai bath is returned by due date Difference = Exporter lost
Bank
Borrow the money (Thai Baht)
Interest
Bank
Deposit in dollar
Interest
Exchange “Baht” to “Dollar”
U.S Exporter
Thai Importer
Negotiate to buy goods today
Agreement bases on paying in baht
Thai bath is paid by due date

6. The Market Basics of Forward Foreign Exchange
The agreement to exchange on currency for another in some date in the future at a price set now (the Forward Exchange Rate).
Bank
Forward Foreign exchange contract (to buy)
Fee
Sometimes in the future (Normally, 30, 90, and 180 days)
25 Bath/ 1 dollar
U.S Exporter
Thai Importer
Negotiate to buy goods today
Agreement bases on paying in dollar
Hedging Using Forward Foreign Exchange

7. Thai bath is sold by due date
Bank
Forward Foreign exchange contract (to Sell)
Dollar is returned
25 Bath/ 1 dollar
U.S Exporter
Thai Importer
Negotiate to buy goods today
Agreement bases on paying in baht
Thai bath is paid by due date

8. Speculating Using Forward Foreign Exchange
Bull Speculator
Bull Market
Expect the value of other currency will appreciate. (i.e., from 25 baht/ 1dollar to 24 baht/1dollar)
Bank
Buy other currency (Thai bath*)
Bull Speculator (US)
Bank
Other currency will be sold sometimes in the future (Baht will be sold)
Right prediction = profit
Wrong prediction = lost
*In the meantime, this amount of money will be deposited in the bank for the interest

9. Borrow other currency (Thai bath)
Bear Speculator
Bear Market
Expect the value of other currency will depreciate. (i.e., from 25 baht/ 1dollar to 26 baht/1dollar)
Bank
Borrow other currency (Thai bath)
Sometimes in the future, their own currency will be exchanged back into other currency; and other currency be will returned to the bank. In this case, the rest of other currency is profit. (Dollar to bath ; and bath will be returned)
Bear Speculator (US)
Exchange it into its currency by using spot rate (Thai bath to dollar*)
Right prediction = profit
Wrong prediction = lost
*In the meantime, this amount of money will be deposited in the bank for the interest.

10. Financial Investment on Spot Exchange Rate Basis
Sell & Buy on
spot rate basis
Current $
Current £

11. Financial Investment on Forward Exchange Rate Basis
Buy $ (Sell £ for $)
Future £
Future $
Buy £ (Sell $ for £)
Borrow in the U.S.
Invest in the U.S.
Borrow in the U.K.
Invest in the U.K.
Current $
Current £

12. Interest Arbitrage 1) Covered Interest Arbitrage
The process for buying a country’s currency spot and selling that country’s currency forward; this is the riskless procedure which could also make a net profit from the combination of the different in interest rates between countries and the forward premium on that country’s currency.
2) Uncovered Interest Arbitrage
The process for buying a country’s currency spot and selling that country’s currency without forward ; this is the high-risk procedure which could also make a net profit from the combination of the different in interest rates between countries and the forward premium on that country’s currency.