Tag Archives | currency exchange

Transfer Risk

See Also:
Electronic Funds Transfer (EFT)
Transfer Pricing
Transaction Exposure
Hedging Risk
Accounting Controls

Transfer Risk Definition

Transfer risk is defined as the risk associated with currency conversion from the money of one nation to another. It is a large factor in international business and currency trading alike. Transfer risk may be associated with changes in currency value, currency exchange restrictions, the value of a given set of goods, and more. Many businesses keep a reserve of cash, often referred to as a transfer risk reserve, to deal with these issues.

Transfer Risk Explanation

Transfer risk, explained also as the risk of transferring money across boarders, has many implications. For currency traders, this risk mainly effects the value of a trade they have or were going to make. This could cause the trader to loose a substantial percentage on any unit: marks, pesos or even dollars.

For companies doing commerce across boarders transfer risk is more comprehensive. This risk can effect the value of funds, made in another country, upon conversion. More than this, transfer risk can effect other parts of the deal. It can also be cause by surprising restrictions on the amount of money pulled out of a country, the value of the goods which a company imports or exports, and more. When a company does business internationally it is subject to the regulations of that government. So, the company can quickly experience changes in banking regulations, commerce regulations, port laws and much more. In this way, transfer risk can become a substantial variable which could lead to failure of the business as a whole.

Example

Don imports products to be sold in the eastern European nation. Working mainly with music from the USA, Don has a lot of work to do before one deal is completed and the product is sold. Though Don has experience in transfer risk management he is not infallible.

Recently, Don fears he may be a victim of transfer risk. The federal bank of one of these nations is considering a few new regulations: these restrictions could ruin his deal by requiring him to keep his funds in the nations bank for 6 months before removing them to his home in the USA. Additionally, the international markets are recoiling from this change and the currency of the nation Don does commerce in is expected to decrease in value as compared to the dollar. From a former multi-million dollar deal Don could come out with a loss.

Don is at ease when he sees that the nation decided not to change regulations. This has been a wakeup call for him; his business could be closed in an instant. Don resolves to continue regular research to keep abreast with trends in the nations he works within.

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Finance Derivatives

See Also:
Finance Beta Definition
Finance Leverage Definition
Hedge Funds
Hedging Risk
Financial Ratios

Finance Derivatives Definition

Finance derivatives are a contract that derives its value from an underlying asset or factor. In short, the value of a derivative depends on the value of something else. When the value of the underlying factor changes, the value of the derivative instrument changes. Derivatives are often used for speculation or for hedging risk.

Derivatives Instruments

Common derivatives instruments include futures, forwards, options, and swaps. In addition, common underlying assets or factors include stocks, bonds, currency exchange rates, commodities, market indices, and interest rates. However, derivatives can derive their value from almost anything, including weather data and political election outcomes.

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Finance Derivatives Definition, Finance Derivatives

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Finance Derivatives Definition, Finance Derivatives

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Currency Exchange Rates

See Also:
Currency Swap
Transaction Exposure
Hot Money
Exchange Traded Funds
Required Rate of Return
Hedge Funds
Fiat Money

Currency Exchange Rates

An exchange rate gives the value of one currency in terms of another. An exchange rate can be computed for any two currencies. Exchange rates are typically quoted to at least four decimal places.

Foreign currencies are exchanged for investment and speculative purposes and for hedging risk. Foreign currencies are traded all over the world twenty-four hours a day via banks and brokerages. The foreign exchange market is the largest market in the world. Speculating in foreign exchange markets is considered very risky.

Fixed Exchange Rates vs. Floating Exchange Rates

An exchange rate can be fixed or floating. A fixed rate is determined and maintained by government central banks. A floating rate is determined by market forces.

A fixed rate, or peg, maintains a set exchange rate for one currency in terms of another. For example, assume the Chinese Yuan is pegged to the US Dollar. If the US Dollar declines in value, then the Chinese Yuan will also decline in value so that the exchange rate remains unchanged.

A floating rate allows the exchange rate between two currencies to fluctuate freely based on the supply and demand of each currency, as well as other relevant economic factors. For example, the exchange rate between the US Dollar and the Euro is a floating rate. Due to market forces, the exchange rate between these two currencies fluctuates continuously.

Currency Spot Prices

The spot exchange rate for two currencies is the rate of exchange for immediate (within two business days) delivery. For example, if a trader wants to exchange US Dollars for Euros today, he would do so at the spot rate.

Currency Forward Rate

The forward exchange rate for two currencies is the rate of exchange for future delivery. Forward rates are often quoted for 1-month, 3-month, and 6-month contracts. If a trader plans to exchange US Dollars for Euros three months from now, but wants to fix the price of the conversion today, he can do so by purchasing Euros at the 3-month forward rate. In three months the trader would receive the amount of Euros determined by the forward rate contract, regardless of the spot rate at that time.

Appreciation and Depreciation of Currency

Appreciation, or revaluation, refers to an increase in the spot rate value of one currency in relation to another.

Depreciation, or devaluation, refers to a decrease in the spot rate value of one currency in relation to another.

Direct Quote vs. Indirect Quote

A direct quote shows the home currency price of one unit of foreign currency. An indirect quote shows the foreign currency price of one unit of home currency. For example, consider these hypothetical direct and indirect quotes between the Euro and the US Dollar, using the US Dollar as the home currency:

Direct Quote:        $1.5501 = €1        (1/.6451)

Indirect Quote:      €.6451 = $1         (1/1.5501)

FOREX Rates (FX Rates)

Currency exchange rates are also called forex rates or fx rates.

Exchange Rate Converter

For foreign currency conversions, go to: www.oanda.com

Exchange Rates – Historical

For historic exchange rate data, go to: www.oanda.com

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American Depositary Receipts (ADRs)

American Depositary Receipts (ADR) Definition

American Depositary Receipts (ADR) are intermediaries so that investors can invest in foreign markets and exchanges. ADRs hold a claim on the foreign stocks held by banks within the United States.

American Depositary Receipts (ADR) Explained

Often times it is difficult for Americans to invest in foreign stocks. In light of this difficulty U.S. banks have developed a way for investors to easily invest by offering ADRs. The bank acts as an intermediary into foreign markets by buying the foreign stocks and holding them in their vault. They then issue American depositary receipts into the market and these receipts can be more readily traded. This makes a normally illiquid investment much more liquid and worthwhile to investors. If these companies issue stock the bank can also exchange the foreign currency for U.S. dollars at bank rates making the investment in ADRs that much better. The current ADR market exceeds $2 trillion this day, and has been rapidly growing at a rate above 20% each year.

American Depositary Receipts (ADR) Example

Josh is looking to invest in some foreign stocks, but does not want to go directly to the foreign exchanges because it is difficult for him to buy and sell when he needs. Therefore, Josh has decided to invest in ADRs which are listed on the NASDAQ. This means that Josh can enjoy a foreign investment which is much more liquid. His dividends can also be exchanged at a more favorable rate because the issuing bank is performing the currency exchange.

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american depositary receipts

See Also:
Financial Instruments
Term Deposit
Common Stock Definition
Return on Equity Analysis

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