• In addition to understanding the operations of 
   domestic financial markets, a financial manager must 
   also understand the operations of foreign exchange 
   markets and foreign capital markets. 
  • foreign exchange markets(FX)
  • The foreign exchange market is the market in 
   which participants are able to buy, sell, 
   exchange and speculate on currencies
  • foreign exchange markets facilitate:
  - foreign trade 
  - the raising of capital in foreign markets
  - the transfer of risk between participants 
  - speculation on currency values. 
  • foreign exchange rate 
  • is the price at which one currency (e.g.,the U.S. dollar) 
   can be exchanged for another currency (e.g., Saudi 
   Riyal SAR) in the foreign exchange markets. 
  • If US company has a global business in Saudi, they 
   generate income in SAR and then the amount is 
   exchanged for US dollar.
  • the actual amount of U.S. dollars received on a foreign 
   transaction depends on the (foreign) exchange rate 
   between the U.S. dollar and the Riyal SAR.
  • Foregin Exchange transaction are exposed to 
   foreign exchange risk as the cash flows are 
   converted into and out of local currency. 
  • foreign exchange risk 
  • Risk that cash flows will vary as the actual 
   amount of U.S. dollars received on a foreign 
   investment changes due to a change in foreign 
   exchange rates. 
  • currency depreciation 
  • When a country’s currency falls in value 
   relative to other currencies, meaning the 
   country’s goods become cheaper for foreign 
   buyers and foreign goods become more 
   expensive for foreign sellers.