An explanation of the foreign exchange rate and how it works.
Written in 2007; 1,283 words; 6 sources; APA; $ 43.95
Paper Summary:
The paper defines the foreign exchange rate, and details the differences between fixed and variable rates. The paper explores how, as the financial markets become intensely developed with the growth of globalization, several financial instruments have been created to diversify the possible contract types between the partners, and hedge them against possible risks connected with the foreign currency. The paper details these financial instruments. The paper concludes with details of research that is necessary to further examine fluctuations of the currency rates and their derivatives.
From the Paper:
"The price of a non-dividend paying future can be set by discounting the present price to maturity by the rate of risk free rate of return, which is usually the return on the long term government bonds or bonds with the same maturity as the financial derivative. The forward price is set as follows: Ft,T = Ster(T - t) - PVt(D) + PVt(C) , where it is the spot price at time t discounted at a continuous discount rate minus the present value of the dividends to be received from holding the asset until them plus the present vlaue of the cost of holding the asset. When the forward price is not equal to this equation, there is opportunity for risk free arbitrage."
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