1. FOREIGN EXCHANGE MARKET A.Meaning of foreign exchange quote 1.Direct quote $.6149/DM 2.Indirect quote (reciprocal rate) DM1.6263/$ = 1/.6149 3.Bid rate=$.6149/DM (cell C6) (price bid by bank to purchase DM) Ask rate=$.6273/DM (1/cell F3) (price asked by bank to sell DM) Spread=$.0124=transaction cost

2. 4. Direct Bid rate to convert £ to DM = DM2.607/£ (cell F4) Cross rate DM/£ using $: $1.665/£ (cell C4) and DM1.594/$ (cell F3) ($1.665/£) * (DM1.594/$ )= DM2.654/£ This particular cross rate of £ to $ to DM is more attractive than converting £ directly to DM.

3. B.Comparing quotes from different traders 1.Bilateral arbitrage: New YorkFrankfurt $.4606/DMDM2.1600/$ DM2.1711/$$.4630/DM_____ $1  DM2.1711  $1.0052

4. 2.Trilateral arbitrage New York FrankfurtZurich $.4606/DM DM1.2594/SFSF1.7040/$ DM2.1711/$ SF.794/DM $.5869/SF $1  DM2.1711  SF1.7239  $1.0117

5. C.International cash management 1.Objectives a. Minimize cost of funds b.Improve liquidity c.Reduce risks d.Improve return on investment

6. 2.Cash inflows and outflows a.Beginning cash balance b.Collections c.Disbursements d.Ending cash balance e.Investing surplus cash f.Covering cash shortage g.Ending cash required D.Foreign exchange market efficiency - Foreign exchange rates reflect all publicly available information