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international financial management - Essay Example
Author : khalid51
Finance & Accounting
Pages 9 (2259 words)
International financial management School Affiliation Date 1. Definition of terms In order to get a better understanding of the concept under discussion in this paper, it is necessary to define two concepts that will be in use throughout this report. These terms are “forward exchange rate” and “spot exchange rate” as used in the field of international financial management…
Foreign exchange market makes it possible for both private and commercial transactions including loans, investments, and foreign trade. The existence of a foreign exchange market is a result of economies employing national currencies rather than a common currency (Kumar, and Mukherjee, 2007; Butcher, 2011). If the world economy was to use a single currency, foreign markets could not be a necessity. The foreign exchange market is exceedingly active, and it is largely an over the counter market. Although the exchanges trade futures and option, a number of transactions are over the counter (Brigham, and Houston, 2009). The future expected spot price is the market's belief about an asset’s spot price in the future (Poniachek, 2012). This leads to a question of whether or not one can use the current forward price to predict the particular future spot price. A number of hypotheses have been in place to try clarifying the relationship between the expected future spot price, and the current forward price (Wang, 2009). In the field of financial economics, there has been intensive examination by researchers on the “Forward Rate Unbiased Hypothesis” (FRUH), as Kumar (2011) indicates. ...