ITF

• Buy rate
• Sell rate
• Spread (Buyrate - Sellrate)
• Cross rate (two foreign currencies)
• Spot rate
• Forward rate

Demand:

• Imports paid in FC
• Redemption of FC loans or nterests
• Overseas capital investments in FC

Supply

• Export revenues converted back into HC
• Interest payments / dividends converted back into HC
• Capital investments into HC drom overseas

• Freely floating
• Managed floating
• Stabilised EXrates
• Controlled Exrates (DDR)

• Hedging decisions
• Financing decisions
• Investment decisions
• Capital budgeting
• Earnings assessment

• past and prestent prices
• assumption that historic price patterns influence future price movements
• analysation of historic price movements

• Relationships between economic variables and FX rates
• Frequent usage of simple or multiple regression
• Limtations:
  • Timing of some variables is unnkown
  • Some variables need to be forcasted seperately
  • Some variables are not quantifiable
  • Coefficients from regressions will not remain constant

Usage of spot rate

• Todays rate used as forecast for future spotrates
• Assumption - today's rate reflects all known info

Usage of forward rates

• Rate for a forward business serves as a forecast of the spot rate on this future's due date

• No forecasting is superior
• To better up data different techniques are combined
• Each technique is assigned a weigth according to its reliablity

• Measured by the standard deviation (used as probability distribution)
• Historic movements are used for forecasting
• Historic volatilities change over time
• Economic and political factors can cause abrupt changes

• Large number of market participants
• Information is ready and costless
• Transaction costs are relatively small
• Prices reflect all information about the currency
• Prices adjust rapidly to information
• Prices adjust only to information
• New information is random - price changes randomly
• Therefore fundamental and technical analyses are useles

Weak form:

• Fundamental analysis may produce superior investment result
• Technical analysis may produce superior investment result

Semi-strong form

• The current price reflects all public information
• Only fundamental and technical analysis of inside information are usefull

Strong form:

• Current price reflects all information, including inside information 
• Fundamental and technical analysis of any data are useless

• FX rates cannot be forecasted (Efficient market hypotheses)
• Companies should hold a well diversified portfolio of currencies
• Returns that are consistent with the market can be expected (you cannot beat the market over the long time)
• Impact of FXrisk must be assessed according to the companie's operations

• Transaction risk
• Economic risk
• Translation risk

Impacts:

• on Cash Flow values
• On earnings

Assesment:

• Estimation of net CF in each currencx
• Measurement of potential FX exchange risks

Impacts:

• on the Firm's value
• On operating processes:
  • Imports
  • Exports
  • Local sales
  • Investments
  • Financing

Assessment:

• Sensitivity of earnings
• Snsitivity of cash flows

Caused by:

• Translation of subsidiaries' financial statements
• Consolidated financial statements are exposed to FX rate movements

Determinants:

• Proportion of business conducted by foreign subsidiaries and their currency
• Accounting methods

• Hedging none of the risk
  • Diversification amongst currencies reduces risk
  • No costs of hedging
  • Efficient market hypothesis
• Hedging all risks
  • Improvement of corporate planning
• Selective hedging
  • Only hedging when losses are expected

Start: settlement of the contract

End: Delivery of the payment

Short - debt

Long - not

Net Exposure = Short-Long; IS the amouint that needs to be hedged

• Time horizon
• Available instruments and their dis-/advantages
• Cost

• Contractually agreed measures
• Hedging
• Restructuring
• Special Methods

• Settlement in home currency
• Settlement in third currency
• Hedging agreement (FX-rate fixed in the contract - splitting of the risk)
• Right to select currency for settlement