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FBE 464 International Financial Management Professor Yasushi Hamao Review for Final Exam 1. Forex markets.

• Spot cross rates without bid/ask spread. How are they calculated? How do you do triangular arbitrage if you find deviation from implied cross rates? REVIEW “FOREX MARKETS” •

36 – 42.

Spot cross rates with bid/ask spread. How are they calculated? How do you find triangular arbitrage opportunities and implement arbitrage transactions? REVIEW “FOREX MARKETS” SLIDES 43 – 52. REVIEW “FOREIGN EXCHANGE PROBLEMS” NO. 1 AND 2.

2. Forward exchange rates. • Given spot rate (bid/ask) quotes and forward premium (discount), how do you calculate forward quotes? REVIEW “FORWARD EXCHANGE RATES” SLIDES 16 – 21. REVIEW “FOREIGN EXCHANGE PROBLEMS” NO. 4. • How is forward premium/discount in percentage terms computed? REVIEW “FORWARD EXCHANGE RATES” •

22 – 30.

Forward market and money market hedge and speculation. Remember that forward transactions do not involve money changing hands upfront, so you DON’T need to borrow. REVIEW “FORWARD EXCHANGE RATES” SLIDES 42 – 53. REVIEW “FOREIGN EXCHANGE PROBLEMS” NO. 5 AND NO.6.

Bid/Ask spread. Remember you always trade to the price that is in the bank’s favor.


UIRP can be used to forecast future spot rates. In the short-run particularly.3. How do you use CIRP to obtain forward rates? Be careful about the way (dc/fc) the FX is quoted. But in the long-run. 15 – 20 2 . REVIEW “PURCHASING POWER PARITY” • SLIDES 45 – 46. REVIEW “FOREIGN EXCHANGE PROBLEMS” NO. and convert a discount rate in one currency to that in another currency. Understand positions for buyer and seller of options. 49. • Pay-off diagrams. • Relative PPP. How do you do it? REVIEW “VALUATION EXAMPLE” WORKSHEET. • CIRP states that forward discount/premium should be (approximately) equal to interest differential. • Assuming risk-neutrality. 7. REVIEW “INTEREST RATE PARITY” SLIDES 17 – 24. REVIEW “IRP FACTOR AND CONVERSION OF DISCOUNT RATE” SLIDES. AND • Using UIRP to forecast future spot rates. PPP and IRP. REVIEW “FOREIGN EXCHANGE OPTIONS” SLIDES 2 – 3. it is not reliable. 4. there should be an arbitrage opportunity. If not. FX options. it can be useful to forecast future spot rates. REVIEW “INTEREST RATE PARITY” SLIDES 39 – 43.

Importance of the value of financial side effects. REVIEW CASE ANALYSIS OF “THE WALT DISNEY COMPANY’S YEN FINANCING”. 3 . Capital budgeting. REVIEW “FXSWAP VER2” WORKSHEET . REVIEW CASE ANALYSIS OF "VODAFONE AIRTOUCH'S BID “OCEAN DRILLING” AND “SIMMONS JAPAN LIMITED”. REVIEW “INTERNATIONAL CAPITAL BUDGETING” REVIEW “VALUATION EXAMPLE” WORKSHEET. REVIEW “INTEREST RATE AND CURRENCY SWAPS” SLIDES 30– 48.5. Principles of ANVP methods. REVIEW CASE ANALYSIS OF “THE WALT DISNEY COMPANY’S YEN FINANCING”. • Equivalence of two methods (foreign discount rate and spot exchange rate. and expected spot rates and domestic discount rate). REVIEW “INTEREST RATE AND CURRENCY SWAPS” SLIDES 49 – 77. FOR MANNESMANN". 6. • SLIDES 19 – 22. • Understand cash flow structures of intermediated swaps. Interest rate and currency swaps • The fundamental rationale for swaps is to exploit comparative borrowing advantages of two counterparties.