Corporate Finance, semestre 2

...

• In afternoon , markets open in New York

Characteristics

• Very liquid and €, $ and £ traded

continuously

• It’s fast....prices change as often as

20 times a minute

• Estimated that the world’s most

active exchange rates can change

18,000 x each day

[pic 14]

The Euro v The Dollar

The € has got weaker since 2012

meaning the $ is stronger. Good

for French exports to USA but bad when

you want to buy something in $

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Important for Business

• Companies have expanded overseas

and so foreign currency exposure

increased

• Foreign exchange controls lifted by

many countries

Example

• Aurelia lives in New York. She wants

to buy $5m of French investments

(appt). She wants to buy in 3 months.

• Current exchange rate is €1:$1.60

• How much will Aurelia pay in 3 months

if exchange rate on 23/08/26 is:

• €1:$1.60 ( a weak $ / a strong €)

• €1:$1.40

• €1:$1.00(a strong $ / a weak €)

Example (2)

• €1:$1.60

€5,000,000 x 1.6 = $8,000,000

• €1:$1.40

€5,000,000 x 1.4 = $7,000,000

• €1:$1€5,000,000 = $5,000,000

• Aurelia could save $3,000,000 depending on the

exchange rate

Translation Risk

• You have €100m investment in US

• Prices of investments do not change

• But big changes to your investment if

euro value changes

• €1:$1

• €1:$2

$1 €1

$2 €1

$m

€m

$m

€m

100

100

200

100

• Appears 100% return but it’s just forex

movement

[pic 15]

Operating or economic risk

• A tour operator specialises in providing guided

tours to overseas investors. Since tours are done in France, bills clients in euros.

• Revenue depends on

1. Euro charge per tour sold

2. Number of tours sold

•

If euro strengthens the tours will be more

expensive for foreigners and so number of

tours (and revenue) will fall

•

Samy Tours has no import/export but revenues

and profits impacted by forex fluctuations

[pic 16]

The Spread

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The Spread

• Foreign exchange quoted in two rates: the rate at which you buy the currency and the rate at which you sell the currency.

• Example:

$1.4 - $1.5

Bank Buys

Bank Sells

€1.00 will get $1.4

$1.5 will get €1.00

You sell €

You buy €

• The bank always gives you the worst rate !!

For You

• You go to USA in July with €1 000.

Question: How many $ do you get ?

• You return to Paris in August with

$1 400.

Question: How many € do you get

back ?

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[pic 17]

What Currency Used

for Trade

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The $ is most important currency

• Many international transactions are done using dollars

•