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CAPITAL MARKET: allocates debt and equity resources

Friday the dollar was trading at 116.68 yen, down from 119.45 Thursday. Sterling was at $1.7065, down from $1.7110. Is the exchange rate quote for the U.S. dollar a direct or indirect quote on the (a) yen? (b) sterling (British Pound)?

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CAPITAL MARKET: allocates debt and equity resources

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  1. Friday the dollar was trading at 116.68 yen, down from 119.45 Thursday. Sterling was at $1.7065, down from $1.7110. • Is the exchange rate quote for the U.S. dollar a direct or indirect quote on the (a) yen? (b) sterling (British Pound)? • If 1$=116 yen: which is the quoted and which is base currency? • From Thursday to Friday, what was the percentage change in the value of the dollar against the yen? (b) sterling?

  2. CAPITAL MARKET: allocates debt and equity resources • OFFSHORE FINANCIAL CENTERS: Operational (London) and Booking (islands) • INTERBANK (LIBOR) rates • HEDGING - insurance • ARBITRAGE – instantaneous • SPOT RATE – FORWARD RATE • CURRENCY OPTION

  3. $1 = ¥120 • Base currency is $, quoted currency is ¥. • Direct quote on ¥, indirect quote on $. • ¥1 = $0.00833 • $ is quoted currency & direct quote • Direct quote = 1/Indirect quote • Indirect quote = 1/Direct quote

  4. PERCENT CHANGE • *YIELD IS ON BASE CURRENCY • January $1=D5, May $1=D4 • % Change= (Pn-Po)/Po x 100 • (4-5/5) x 100 = -20%

  5. MEXICO CRISIS 1994 • Fast growth • Portfolio investment • Chiapas & assassination • Rising U.S. interest rates • ’94 devaluation & $50 bil. loan

  6. ARGENTINA 2001-2002 • Populism • Hyperinflation • Currency board - $ • Brazil devalues in 1999 • U.S. $ strong • Debt crisis, Peso loses 70% of value

  7. EURO DEPRECIATION ‘02 • Cash under the mattress? • Taxman? Police? • Spain “Dinero “B” = est. $53 bil. • Italy = $175 bil?

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