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Forex - Spot/Forward rates and Calculation of Premium and Discount - By CA Gopal Somani
 
16:50
This Video explains the Concept of Spot and Forward rate, Calculation of forward Premium and Discount in foreign Exchange Management in Financial Management. This video will be helpful for CA, CS, CMA Students.
Views: 60933 CA Gopal Somani
Spot vs Forward Rates
 
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An intro to the difference between foreign exchange spot and forward rates. For more questions, problem sets, and additional content please see: www.Harpett.com. Video by Chase DeHan, Assistant Professor of Finance and Economics at the University of South Carolina Upstate.
Views: 59622 Harpett
calculate and interpret a forward discount or premium;
 
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calculate and interpret a forward discount or premium;
Views: 811 Ted Stephenson
Spot Rate, Forward Rate, Appreciation & Depreciation of Currencies in Forex | CMA and CA Final SFM
 
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#Forex, #Premium, #SpotRate, #ForwardRate, #Appreciation, #Depreciation We simplify your financial learnings. ►►Subscribe here to learn more of Strategic Financial Management: https://goo.gl/HTY5SN Find us on Facebook: https://www.facebook.com/SFM-Guru-1862953747049133/ Read more on our website: http://sfmguru.in/blog CA Final SFM Fast Track Course: https://sfmguru.in/ca-final-sfm/
12  Annualized forward premium and discount on a currency
 
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Forward currency exchange rates often differ from the spot exchange rate. If the forward exchange rate for a currency is higher than the spot rate, there is a premium on that currency. A discount exists when the forward exchange rate is lower than the spot rate. A negative premium is equivalent to a discount. Forward Price - Spot Price x 12/n x 100%
Views: 6019 financeschoolin
Foreign Exchange Spot rate Forward rate Buying rate Numerical with calculations bfm
 
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JAIIB CAIIB - Foreign Exchange spot rate forward rate fully explained along with numerical problem on bill buying rate. What is Foreign exchange? what is spot rate? what is forward rate? What is direct and indirect quote? Exchange rate arithmetic. Value date concepts Cash/ready, TOM, SPOT, Forward rate, Premium and Discount Forward points Arbitrage How to calculate forward points? Method of quoting forward rates. GET 3000+ JAIIB PREVIOUS YEAR QUESTIONS, Study Notes, Videos https://goo.gl/M8zMrV ------------------------------------------------------------- GET 4000+ CAIIB PREVIOUS YEAR QUESTIONS, Study Notes, Videos https://goo.gl/QGq6Sc Caiib BFM case study on Risk Weighed Assets https://www.youtube.com/watch?v=_80CvrvY3SM case study on Risk Weighed Assets Part 2 https://www.youtube.com/watch?v=SI7o6in1nmk GDP Cost Factor, Debt Equity Ratio, Elasticity https://www.youtube.com/watch?v=XsSjnRygk3s Case Study on Ratio Analysis https://www.youtube.com/watch?v=oMj08U679eQ Case Study on Balancesheet Part 2 https://www.youtube.com/watch?v=NX5k5l_xQiw Case Study on Balancesheet (ABM) https://www.youtube.com/watch?v=dT5wcOuyOxA join whatsapp group https://chat.whatsapp.com/1fUrovD1W2ICxHqAUx82Kv -~-~~-~~~-~~-~- Please watch: "Protection to Collecting Banker NI Act Legal and Regulatory Aspects of Banking JAIIB" https://www.youtube.com/watch?v=V-hiw3njkak -~-~~-~~~-~~-~-
Views: 15100 Learning sessions
Forward exchange rate
 
10:07
The forward exchange rate is the exchange rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor. Multinational corporations, banks, and other financial institutions enter into forward contracts to take advantage of the forward rate for hedging purposes. The forward exchange rate is determined by a parity relationship among the spot exchange rate and differences in interest rates between two countries, which reflects an economic equilibrium in the foreign exchange market under which arbitrage opportunities are eliminated. When in equilibrium, and when interest rates vary across two countries, the parity condition implies that the forward rate includes a premium or discount reflecting the interest rate differential. Forward exchange rates have important theoretical implications for forecasting future spot exchange rates. Financial economists have put forth a hypothesis that the forward rate accurately predicts the future spot rate, for which empirical evidence is mixed. This video is targeted to blind users. Attribution: Article text available under CC-BY-SA Creative Commons image source in video
Views: 909 Audiopedia
What is FORWARD PREMIUM ANOMALY? What does FORWARD PREMIUM ANOMALY mean?
 
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What is FORWARD PREMIUM ANOMALY? What does FORWARD PREMIUM ANOMALY mean? FORWARD PREMIUM ANOMALY meaning - FORWARD PREMIUM ANOMALY definition - FORWARD PREMIUM ANOMALY explanation. SUBSCRIBE to our Google Earth flights channel - http://www.youtube.com/channel/UC6UuCPh7GrXznZi0Hz2YQnQ?sub_confirmation=1 Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license. The forward premium anomaly in currency markets (also referred to as the forward premium puzzle or the Fama puzzle) refers to the well documented empirical finding that the domestic currency appreciates when domestic nominal interest rates exceed foreign interest rates. This is by some perceived as puzzling because one hypothesis has been that expected future change in the exchange rate between two countries is equal to the interest-rate differentials between these two countries. The idea behind the hypothesis is that if all currencies are equally risky investors would demand higher interest rates on currencies expected to fall in value. Thus, appreciation of the domestic currency when domestic interest rates are greater than foreign interest rates is called an anomaly.
Views: 233 The Audiopedia
Currency Forward Contracts
 
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This tutorial explains the basics of a currency forward contract
Views: 59013 collegefinance
What is Forex Forward Premium
 
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Is the currency moving at a premium that is above its nominal rate? Here's a simple explanation on Forward Premium Concept with trading example using IQ Option.
Views: 246 SamT
CFA Level 2 (2019): Economics - Calculating Forward Rate and Forward Premium Discount
 
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This is from Reading 11: Currency Exchange Rates Understanding Equilibrium Value. Note where the interest rates fall in the formula when calculating forward rates.
Views: 436 Fabian Moa
Forward exchange rate
 
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A forward exchange contract—also called a forward currency contract—is an agreement between you and your bank in which the bank agrees to buy or sell a certain amount in a foreign currency at a fixed rate of exchange on, or during a period up to, a particular date. Created at http://www.b2bwhiteboard.com
Views: 2099 B2Bwhiteboard
JAIIB Foreign Exchange Forex Forward Rates Premium Discount By Vishal Mantri 9960560404
 
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JAIIB Foreign Exchange Forex Forward Rates Premium Discount fully explained. Get question bank with explanations on https://yuvaguru.com The bid/ask spread of the fx and interest rate markets accounts for the 12 fx point balance. The example serves to provide a “back of the envelope” guide to calculating fx forward points and outright rates. Even though the calculation of the forward points is mathematically derived from the interest rate market, interest rates themselves are the market’s expectation of the outlook for an economy’s fundamentals i.e. subjective. Therefore the fx forward points are derived from traders positioning on interest rate differentials. Exporters from countries with higher interest rate environments such as New Zealand and Australia benefit from the negative forward points, while it is a cost to importers. An exporter wants a weak base currency so large negative forward points are an economic advantage. With an upward sloping interest rate yield curve (or more correctly positive interest rate differential) forward points will be more negative the longer the time horizon. An importer wants a strong currency therefore negative forward points are detrimental to the hedged conversion rate. The impact of negative forward points is a reason that exporters often have longer term hedging horizons compared to importers because the impact of forward points are not penal. Forward exchange contracts are therefore a flexible, and relatively easy to understand, hedging tool that is commonly used to bring certainty to those grappling with foreign exchange exposures and the volatility of the financial markets.
Views: 20356 yuvaguru
FOREX   6  COMPUTATION OF PREMIUM AND DISCOUNT ON FOREX
 
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CA FINAL - SFM- FOREX-PREMIUM AND DISCOUNT ON FOREX
Views: 411 CA Govinda Goyal
CFA Level II: Currency Exchange Rates: Determination and Forecasting Part I(of 3)
 
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FinTree website link: http://www.fintreeindia.com FB Page link :http://www.facebook.com/Fin... This series of videos covers the following key areas: the bid-ask spread on a spot or forward foreign currency quotation and describe the factors that affect the bid-offer spread triangular arbitrage opportunity and calculate its profit, given the bid-offer quotations for three currencies spot and forward rates and calculate the forward premium/discount for a given currency mark-to-market value of a forward contract international parity relations Relations among the international parity conditions use of the current spot rate, the forward rate, purchasing power parity, and uncovered interest parity to forecast future spot exchange rates flows in the balance of payment accounts affect currency exchange rates approaches to assessing the long-run fair value of an exchange rate carry trade and its relation to uncovered interest rate parity and calculate the profit from a carry trade carry trade and its relation to uncovered interest rate parity and calculate the profit from a carry trade potential effects of monetary and fiscal policy on exchange rates objectives of central bank intervention and capital controls and describe the effectiveness of intervention and capital controls warning signs of a currency crisis uses of technical analysis in forecasting exchange rates We love what we do, and we make awesome video lectures for CFA and FRM exams. Our Video Lectures are comprehensive, easy to understand and most importantly, fun to study with! This Video lecture was recorded by our popular trainer for CFA, Mr. Utkarsh Jain, during one of his live CFA Level II Classes in Pune (India). CFA Level #CFA #FRM #FinTree
FORWARD EXCHANGE RATES (BSE)
 
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Subject : Bussiness Economic Paper : International finance
Views: 287 Vidya-mitra
Forwards Contracts (Derivatives): Forward Rate, Spot Rate, Bid & Ask Rate, Profit & Loss
 
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Derivatives 2: Forward Contracts have been explained with a special focus on Bankers screen and bid & ask rates therein. The video clarifies Spot and Forward rates and thereby helps in calculating profit from the currency forward contracts. Subscribe, Share and Spread Learn and spread Learnings. Be a finance Expert! Contact: [email protected] Mention in comments for improvements and suggestions. Also if you need a video in Hindi, let me know. I'll make one for you. For the notes on the video topics, ping on the mail. They'll be sent right away! Keep Watching! Keep Learning!
Views: 1696 FinTank Solutions
CFA Level I - Question Bank - Calculation of Forward Rate from Spot Rates
 
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http://www.fintreeindia.com [FinTree website link] This Video lecture was recorded by Pro. Mr. Utkarsh Jain expert in CFA, during one of his live CFA Level I Classes in Pune (India). In this video the explaion given about the question from question bank We love what we do, and we make awesome video lectures for CFA and FRM exams. Our Video Lectures are comprehensive, easy to understand and most importantly, fun to study with! FB Page link :http://www.facebook.com/Fin... #CFA #FRM #FinTree
Lecture 2.1 Exchange Rates
 
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This lecture introduces the concept of exchange rates, direct and indirect quotation, spot and forward exchange rates.
Views: 456 Cloud Classes
Forward Rate Example
 
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This is an example of how to compute a currency exchange rate for a company hedging risk. For more questions, problem sets, and additional content please see: www.Harpett.com. Video by Chase DeHan, Assistant Professor of Finance and Economics at the University of South Carolina Upstate.
Views: 3971 Harpett
Mod-01 Lec-10 Foreign Exchange Forward Contracts
 
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International Finance by Dr. Arun K. Misra, Department of Management, IIT Kharagpur. For more details on NPTEL visit http://nptel.iitm.ac.in
Views: 14144 nptelhrd
Forward Premium
 
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An Easy Overview Of Forward Premium
Views: 2707 Christopher Hunt
10 Swap Points =  FORWARD - SPOT
 
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Foreign exchange swap, forex swap, or FX swap = s a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates. difference between the forward rate and the spot rate. These points are computed using an economic concept called Interest Rate Parity. Swap Points = Forward Price - Spot Price
Views: 6148 financeschoolin
Direct Rate, Indirect Rate, Cross Rate Cash rate, Tom Rate, Spot Rate, Forward Rate Premium Discount
 
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Direct Rate, Indirect Rate, Cross Rate Cash rate, Tom Rate, Spot Rate, Forward Rate Premium Discount Bill Buying Rate, Bill Selling rate, TT buying Rate, TT selling rate Useful for JAIIB Paper CAIIB 2nd Paper further details Contact 8077227729, 9219421100 or go to website /Click on the link below http://knifebankerscollege.com/visitor/news
Calculating the Forward Rate
 
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This video shows how to calculate the Forward Rate using yields from zero-coupon bonds. A comprehensive example is provided along with a formula to show how the Forward Rate is computed based on zero-coupon yields. Edspira is your source for business and financial education. To view the entire video library for free, visit http://www.Edspira.com To like us on Facebook, visit https://www.facebook.com/Edspira Edspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD. The goal of Michael's life is to increase access to education so all people can achieve their dreams. To learn more about Michael's story, visit http://www.MichaelMcLaughlin.com To follow Michael on Facebook, visit https://facebook.com/Prof.Michael.McLaughlin To follow Michael on Twitter, visit https://twitter.com/Prof_McLaughlin
Views: 86426 Edspira
What is Forward Rate
 
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Install our android app CARAJACLASSES to view lectures direct in your mobile - https://bit.ly/2S1oPM6 Join my Whatsapp Broadcast / Group to receive daily lectures on similar topics through this Whatsapp direct link https://wa.me/917736022001 by simply messaging YOUTUBE LECTURES Did you liked this video lecture? Then please check out the complete course related to this lecture, Forex Management - Detailed Study for CA / CS / CFA Exams with 30+ Lectures, 2+ hours content available at discounted price (10% off)with life time validity and certificate of completion. Enrollment Link For Students Outside India: https://www.udemy.com/financial-management-in-tamil/?couponCode=YTBFMT18 Enrollment Link For Students From India: https://www.instamojo.com/caraja/financial-management-in-tamil/?discount=ytbspl Our website link : https://www.carajaclasses.com Welcome to the course International Finance - A Comprehensive Study. In this course, you will learn about the International Finance and its related aspects covering a) What are Forex Rates? b) What is Bid / Ask / Swap / Spread? c) How to compute Depreciation / Appreciation of Currencies? d) Why Foreign Currency Rates Fluctuates? e) What are Foreign Exchange Risks? f) How to hedge Foreign Currency Transactions through Forward Contracts, Future Contracts and Option Contracts. This course is structured keeping Professional course students in mind like CA / CPA / CFA / CMA / MBA Finance, etc. This course will equip you for approaching those professional examinations. This course is presented in simple language with examples. This course has video lectures (with writings on Black / Green Board / Note book, etc). You would feel you are attending a real class. This course is structured in self paced learning style. You would require good internet connection for interruption free learning process. You have to go through the videos leisurely to grab the concepts with clarity. This course consolidates my other courses on Forex namely • Forex Basics • Forex Rates - Why it fluctuates? • Learn Forex Risk: Understand Forex Decision Making By taking this course, you need not take the above course. Take this course to gain strong hold on International Finance. What are the requirements? • Students should have basic knowledge on Accounting and Financial Management What am I going to get from this course? • Over 37 lectures and 2.5 hours of content! • Understand Basics of International Finance • Understand Technical Terms used in Forex Transactions • Understand Forex Risks • Understand Forex Hedging Mechanism • Understand International Capital Budgeting Methods What is the target audience? • This coursed is structured keeping Professional course students like CA / CPA /CMA / CFA / MBA (Finance) in mind.
Views: 10558 CARAJACLASSES
What is FORWARD EXCHANGE MARKET? What does FORWARD EXCHANGE MARKET mean?
 
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What is FORWARD EXCHANGE MARKET? What does FORWARD EXCHANGE MARKET mean? FORWARD EXCHANGE MARKET meaning - FORWARD EXCHANGE MARKET definition - FORWARD EXCHANGE MARKET explanation. Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license. SUBSCRIBE to our Google Earth flights channel - https://www.youtube.com/channel/UC6UuCPh7GrXznZi0Hz2YQnQ The forward exchange market is a market for contracts that ensure the future delivery of a foreign currency at a specified exchange rate. The price of a forward contract is known as the forward rate. Forward rates are usually negotiated for delivery one month, three months, or one year after the date of the contract's creation. They usually differ from the spot rate and from each other. If one currency is expected to depreciate against a second, it is said the first currency is selling at a discount on the forward market. The term selling at a premium on the forward market is used for cases in which appreciation is expected. If there is no government intervention on the value of a currency, the forward market will be governed by supply and demand. In such a case it is possible that the forward rate provides information on the future spot rate, but ultimately uncertain. What is certain is that the forward rates reflect the expectations forward market participants have on the changes of the spot rate during the specified interval. If the forward rate and the spot rate are the same, forward market participants do not expect much change in the price of a currency over the given period of time. Forward contracts can be used to hedge or cover exposure to foreign exchange risk.
Views: 117 The Audiopedia
Foreign Exchange Arithmetic |Macro economics|BFM|JAIIB|CAIIB|in Hindi]
 
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Concepts of foreign exchange in Accounting and finance for bankers: What is Foreign exchange? What is direct and indirect quote? What is Forex? Foreign exchange rate and its types Exchange rate arithmetic. Value date concepts Cash/ready, TOM, SPOT, Forward rate, Premium and Discount Forward points Arbitrage How to calculate forward points? Method of quoting forward rates.
Views: 78479 GrowYourself
Setting a Foreign Exchange Forward Rate
 
02:08
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Views: 6515 Kevin Amor
Currency Forward Agreement
 
10:58
This video from N S Toor School of Banking provides explanation of currency forward agreement along with its working through a case.
Views: 22378 Ns Toor
Forward Rate Calculation Using Interest Rate (Preview)
 
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Watch FULL video Click Here: http://www.MBAbullshit.com
Views: 3764 MBAbullshitDotCom
JAIIB Foreign Exchange Forex Forward Rates Premium Discount By Vishal Mantri 9960560404 free
 
05:26
The bid/ask spread of the fx and interest rate markets accounts for the 12 fx point balance. The example serves to provide a “back of the envelope” guide to calculating fx forward points and outright rates. Even though the calculation of the forward points is mathematically derived from the interest rate market, interest rates themselves are the market’s expectation of the outlook for an economy’s fundamentals i.e. subjective. Therefore the fx forward points are derived from traders positioning on interest rate differentials. Exporters from countries with higher interest rate environments such as New Zealand and Australia benefit from the negative forward points, while it is a cost to importers. An exporter wants a weak base currency so large negative forward points are an economic advantage. With an upward sloping interest rate yield curve (or more correctly positive interest rate differential) forward points will be more negative the longer the time horizon. An importer wants a strong currency therefore negative forward points are detrimental to the hedged conversion rate. The impact of negative forward points is a reason that exporters often have longer term hedging horizons compared to importers because the impact of forward points are not penal. Forward exchange contracts are therefore a flexible, and relatively easy to understand, hedging tool that is commonly used to bring certainty to those grappling with foreign exchange exposures and the volatility of the financial markets.
Views: 164 yuvaguru
Forward Market Arbitrage
 
11:59
Views: 6210 arnoldhite
FX Forwards and Pre-Spots: Forward Points, Bid Offer Price Formula, Market Quotes, and Uses
 
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Gives an overview of the FX Forwards, and derives the bid-offer price, and forward points formulae for both FX Forwards and FX Pre-spots transactions.
Views: 162 quantpie
4  Spot and forward rate
 
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SPOT RATE - The price quoted for immediate settlement on a commodity, a security or a currency. The spot rate, also called “spot price,”The spot rate from a foreign exchange perspective is also called the “benchmark rate,” “straightforward rate” or “outright rate.”. Based on supply and demand FORWARD RATE A rate applicable to a financial transaction that will take place in the future. Forward rates are based on the spot rate,It may also refer to the rate fixed for a future financial obligation. Forward rates are widely used for hedging purposes.
Views: 16340 financeschoolin
Forward Contract - Hindi
 
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Forward contract is explained in Hindi. A forward contract is a type of financial derivative that is used to reduce the price risk by a producer and a consumer. It is a customized contract and is not traded on an exchange. Share this Video: https://youtu.be/eRGjHvWHLVM फॉरवर्ड कॉन्ट्रैक्ट को हिंदी में एक्सप्लेन किया गया है। फॉरवर्ड कॉन्ट्रैक्ट एक तरह का फाइनेंसियल डेरिवेटिव है जिसका उपयोग किसी प्रोडूसर और कंस्यूमर द्वारा प्राइस रिस्क को कम करने के लिए किया जाता है। ये एक कस्टमाइज़्ड कॉन्ट्रैक्ट होता है जो किसी एक्सचेंज पर ट्रेड नहीं किया जाता। Subscribe To Our Channel and Get More Finance Tips: https://www.youtube.com/channel/UCsNxHPbaCWL1tKw2hxGQD6g To access more learning resources on finance, check out www.assetyogi.com In this video, we have explained: What is the forward contract in financial derivatives? How forward contract helps to reduce the price risk? What is hedging in the forward contract? How forward contract works? What risks are associated with the forward contract? What are the drawbacks of forward contracts? How forward contract is different from the futures contract? How the settlement of forward contract takes place? The Forward contract is one of the four types of financial derivatives. Forward contract is a customized contract that cannot be traded on an exchange, where the futures contract is a standardized contract. Forward is self-regulated and there's no requirement for a collateral. Make sure to Like and Share this video. Other Great Resources AssetYogi – http://assetyogi.com/ Follow Us: Facebook – https://www.facebook.com/assetyogi Google Plus – https://plus.google.com/+assetyogi-ay Instagram - http://instagram.com/assetyogi Linkedin - http://www.linkedin.com/company/asset-yogi Pinterest - http://pinterest.com/assetyogi/ Twitter - http://twitter.com/assetyogi Hope you liked this video about “Forward Contract”.
Views: 18612 Asset Yogi
CFA Level I- 2015 -Economics : Currency Exchange Rates
 
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FinTree website link: http://www.fintreeindia.com This series of videos disscusses the following key points: Functions of and participants in the foreign exchange market Percentage change in a currency relative to another currency Currency cross rates Forward quotations expressed on a points basis or in percentage terms into an outright forward quotation Arbitrage relationship between spot rates, forward rates, and interest rates Forward discount or premium Forward rate consistent with the spot rate and the interest rate in each currency Exchange rate regimes Effect of exchange rates on countrie's international trade and capital flows FB Page link :http://www.facebook.com/Fin... We love what we do, and we make awesome video lectures for CFA and FRM exams. Our Video Lectures are comprehensive, easy to understand and most importantly, fun to study with! This Video lecture was recorded by our popular trainer for CFA, Mr. Utkarsh Jain, during one of his live CFA Level I Classes in Pune (India). #CFA #FinTree
FRM: Calculate forward given spot rate
 
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Given a 2.0 year spot and a 1.5 year spot, we want to solve for the six month forward staring in 1.5 years. That's the forward rate denoted by 1f3 or 0.5f1.5. For more financial risk management videos, visit our website! http://www.bionicturtle.com.
Views: 130379 Bionic Turtle
Currency Options Step-by-Step
 
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Academic discussion of fundamentals of currency options
Views: 49612 collegefinance
What is a Premium/Discount?
 
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Welcome to the Investors Trading Academy talking glossary of financial terms and events. Our word of the day is “Premium/Discount”. A premium or discount represents the percentage difference between the previous closing market price of an exchange-traded fund, exchange-traded note or closed-end fund and that security's net asset value called an NAV. The security trades at a premium when the NAV of the security is below its previous close and is represented by a positive number. The security trades at a discount when the NAV of the security is above its previous close and is represented by a negative number. In short, if the price of the electronically traded fund also called an ETF is trading above its NAV, the ETF is said to be trading at a “premium.” Conversely, if the price of the ETF is trading below its NAV, the ETF is said to be trading at a “discount.” In relatively calm markets, ETF prices and NAV generally stay close. However, when financial markets become more volatile, ETFs quickly reflect changes in market sentiment, while NAV may take longer to adjust—resulting in premiums and discounts. This can happen throughout the trading day, because the ETF and its underlying securities are actually two distinct liquidity pools that are only loosely linked. If optimistic investors start bidding up an ETF aggressively—more so than its underlying securities—the price of the ETF may rise faster than the price of its underlying securities and, consequently, may trade at a premium. By Barry Norman, Investors Trading Academy
Interest Rate Parity Theory (Forex) | CA Final SFM (New Syllabus) Classes & Videos
 
12:05
We simplify your financial learnings. ►►Subscribe here to learn more of Strategic Financial Management: https://goo.gl/HTY5SN CA Final SFM Fast Track Course: https://sfmguru.in/ca-final-sfm/ Interest Rate Parity Theory The interest rates prevailing in two countries shall be the basis for determining the Fair Forward Price. The actual forward rate has to be same as Fair Forward Price. Otherwise, Arbitrage Opportunity arises. Arbitrage means “making risk free gains”. The theory believes that the exchange rate between the two currencies purely depend upon the interest rates prevailing in the two respective countries. For example, interest rate prevailing in India is 12% p.a. and that in US is 7% p.a., one would try to take advantage of the given situation i.e. by borrowing in US at 7% p.a. and investing in India at 12% p.a. thereby earning the net differential interest of 5% p.a., this is somehow not that simple. In fact as per Interest Rate Parity Theory this is not possible. By the end of the year the exchange rates between ` and $ would have changed adversely in such a way that the interest differential so earned shall be compensated by the exchange loss arising on repayment of US loan. If Interest Rate Parity Theory does not hold good, it will give rise to possibility of arbitrage i.e., making risk free assured gains. The moment arbitragers start using this opportunity for arbitrage gain, the interest rates as well as exchange rates start fluctuating until the equilibrium is achieved i.e., to say Interest Rate Parity Theory starts working. Example on Interest Rate Parity Theory Interest rate prevailing in India 12% p.a. Interest rate prevailing in US 7% p.a. Spot Rate: 1 $ = ` 64 In the given scenario, anyone would want to take advantage of earning interest rate differential of 12% – 7% = 5% by borrowing in US and investing in India. As a result the total gain that can be made in one year based on $ 1,00,000: $ 1,00,000 X `64/$ X 5% = ` 3,20,000 In reality, this gain cannot be made because by end of the year the exchange rate between $ and ` will not be the same. Let us make approximation of such exchange rate using concept of FFR. made through interest rate differentials will be off-set against the resulting exchange loss. Amount Borrowed $ 1,00,000 Add: Interest @ 6% $ 7,000 Total Amount Payable $ 1,07,000 Exchange Rate at the year-end = 66.9907 Therefore, Total Amount Payable = 66.9907 X $ 1,07,000 = ` 71,68,000 Amount Payable as per prevailing Spot Rate at the beginning of the year: $ 1,07,000 X ` 64 = ` 68,48,000 Excess Amount Payable because of Changes in Exchange Rate: ` 71,68,000 – ` 68,48,000 = ` 3,20,000 As per Interest Rate Parity Theory, the resulting exchange loss has completely off-set the gain made through interest rate differential. #InterestRateParity #Forex #CAFinalSFM
Views: 4736 CA Nikhil Jobanputra
Exchange Rate Quotation (Two Way Quotation)
 
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Under the topic International Financial Management, this small video will give you a basic understanding of exchange rate quotation, two way quotation and their denotation.
Views: 12395 Ipu Usms