Corporate Finance, semestre 2

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         Year 5

         Corporate Finance

         Semester 2 Week 1

         Foreign Exchange

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         Exchange Rates

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         Currency Basics

         An exchange rate just expresses the

         price of one currency against

         another

         €1 = $1.60

         €1 = $1.80 means…?

         Answer: the € is stronger

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         Example

         You go on holiday to New York with €1 000

         €1 = $1.60

         €1 = $1.80

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         The Exchange Rate

         • Currencies are traded in the foreign

         exchange market

         • The prices at which currencies trade are

         known as exchange rates

         • When a currency becomes more valuable

         against other currencies, it appreciates

         • When a currency becomes less valuable

         against other currencies, it depreciates

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         For You

         • A marketing company in New Yor

         was for sale for $1 million in 2008.

         How much was that in € ?

         • How much would it cost now ?

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         The € v $

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         Foreign Exchange is a

         Zero sum Game

         (there is a winner and a loser)

         • Carrefour and Casino (both

         companies can increase in value)

         • But $ and € (one increases, the

         other decreases)

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         Foreign Exchange is a

         Zero sum Game

         (there is a winner and a loser)

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         Foreign Currency Risk

         • The Risk for a business/investor of

         change in value of future cash flows

         (or change in value of assets as a

         result of exchange rate movements)

         • E.g. A French exporter is due to

         receive $500,000 in 6 months time

         • The exchange rate of $:€ will change

         and the receipt in euros will change

         • Always bad? No! Upside and downside.

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         Forex (FX)

         Two key types to consider:

         1. Spot market (now)

         2. Forward market (in the future)

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         The French Economy

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         Guess how much is traded

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         Global Foreign Exchange Market

         Turnover

         (the increase is due to globalisation)

         Daily averages in billions of US dollars

         The Foreign Exchange Market

         • Forex market is largest and most

         liquid financial market in the world.

         • Many times larger than the next

         largest market (bond market)

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         Why does it matter ?

         • Eurozone crisis

         https://www.youtube.com/watch?v=BSnAyJ_0AmU

         • Quantatitive Easing

         ( assouplissement)

         • For business operations

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         Forward Contracts

         http://lci.tf1.fr/jt-20h/videos/2016/air-france-des-benefices-mais-des-

         billets-d-avion-toujours-chers-8717279.html

         • Air France made a profit in 2015 because fuel cheaper

         • But fuel is bought in $

         • They did not get the fuel so cheaply because € got weaker against $ so there was less saving

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         Foreign Exchange (Forex)

         • No central market

         • Currencies come in pairs e.g. EUR: USD

         • Dominated by banks (dealers) and large

         international companies

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         It is a 24-hour market

         • Opens in Australia and Far East (Tokyo, Hong Kong and Singapore)

         • Late in the day, markets open in Europe

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