Key Concepts
1. Identify factors that influence exchange rates.
2. Explain how various foreign exchange derivatives can be used to hedge against exchange rate
movements.
3. Explain how arbitrage can assure that currency values are not mispriced.
POINT/COUNTER-POINT:
Do Financial Institutions Need to Consider Foreign Exchange Market
Conditions When Making Domestic Security Market Decisions?
POINT: No. If there is no exchange of currencies, there is no need to monitor the foreign exchange
market.
COUNTER-POINT: Yes. Foreign exchange market conditions can affect an economy or an industry and
therefore affect the valuation of securities. In addition, the valuation of a firm can be affected by currency
movements because of its international business.
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: The counter-point is correct. Students should not view the foreign exchange market as an
isolated market.