| Course | FIN-3340 International Finance |
|---|---|
| Module | Module 2 |
| Paper type | Written assignment 2: foreign exchange markets and corporate governance |
| Length | About 602 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | B.S.B.A. in Finance |
| Updated | October 2026 |
Free sample paper for FIN 3340 Module 2
Pesos per Dollar, Dollars per Peso: Foreign Exchange Basics and a Distributor Agreement
Student Name
B.S.B.A. in Finance, Thomas Edison State University
FIN-3340: International Finance
Mentor Name
Month Day, Year
Pesos per Dollar, Dollars per Peso: Foreign Exchange Basics and a Distributor Agreement
How the Market Works
The foreign exchange market is a decentralized network of banks, dealers, firms and investors trading currencies around the clock, with daily volume in the trillions of dollars. Most trades take place between large banks; firms like Raritan deal with their own bank, which quotes a price at which it will buy and a price at which it will sell. Transactions are spot, settled within two business days, or forward, at a rate agreed today for later settlement (Eiteman et al., 2022). Froot et al. (1993) argue that managing currency risk adds value when it protects the cash a firm needs for planned investment, the reason governance of hedging decisions matters.
Reading the Quotes
Raritan's bank quotes the peso at CLP 948 / 952 per dollar. From a U.S. perspective, a quote in pesos per dollar is an indirect quote; the equivalent direct quote, dollars per peso, is its reciprocal: 1 / 952 = $0.001050 bid and 1 / 948 = $0.001055 ask. When Raritan sells pesos it receives from the bakery chain, the bank buys pesos at its rate that is less favorable to Raritan. Converting CLP 1,140,000,000 at 952 pesos per dollar yields $1,197,479, compared with $1,200,000 at the 950 midpoint, so the spread costs Raritan about $2,500, or 0.21 percent. Spreads are wider for less-traded currencies and smaller transactions.
Cross Rates
Raritan also buys stone hearth plates from a supplier in Italy. If the dollar trades at CLP 950 and at €0.92, the implied peso-euro cross rate is 950 / 0.92 = CLP 1,032.6 per euro. If a bank quoted pesos per euro well away from this figure, a trader could profit by buying euros with dollars, selling them for pesos and buying dollars back, which keeps cross rates consistent.
The Parity Conditions
The parity conditions link exchange rates, interest rates and inflation.
In practice, purchasing power parity holds poorly over short periods, and currencies can deviate from it for years; it is better as a guide to long-run direction than as a forecast. Interest rate parity, by contrast, holds closely for freely traded currencies because banks can arbitrage any gap.
| Condition | Statement | Implication for the peso |
|---|---|---|
| Purchasing power parity, relative form | Exchange rates change to offset inflation differences | With Chilean inflation of 3.5% and U.S. inflation of 2.5%, the peso should weaken about 1% a year |
| International Fisher effect | Interest rate differences reflect expected currency changes | Higher Chilean rates signal expected peso depreciation |
| Interest rate parity | The forward premium or discount equals the interest differential | A 180-day forward rate above spot follows from higher peso rates |
Governing the Distributor Relationship
Raritan plans to sell through a family-controlled Chilean distributor that will also service the ovens. Governance across borders raises agency problems: the distributor knows the local market and customers better than Raritan, and its interests may differ, for example by favoring a competitor's products with better margins. La Porta et al. (1998) found that outside parties are less protected in civil-law countries, so contracts must carry more of the weight. Raritan's agreement should include clear territory and performance targets, payment terms with credit insurance or a letter of credit for large orders, audit rights over service records, arbitration under international rules rather than local courts and termination rights if targets are missed.
Conclusion
Reading quotes correctly, counting spread costs and using the parity conditions to think about direction prepare Raritan for the hedging decisions ahead. Strong contractual governance protects it in a relationship where it cannot rely on local investor protections alone.
References
Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2022). Multinational business finance (16th ed.). Pearson.
Froot, K. A., Scharfstein, D. S., & Stein, J. C. (1993). Risk management: Coordinating corporate investment and financing policies. Journal of Finance, 48(5), 1629-1658. https://doi.org/10.1111/j.1540-6261.1993.tb05123.x
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. Journal of Political Economy, 106(6), 1113-1155. https://doi.org/10.1086/250042
FIN 3340 Module 2 instructions, in plain terms
Currency markets and governance are midterm material; the proctored exam covers the first three modules with short essays and problems. Expect questions on how the foreign exchange market works, quotations, spreads and cross rates, the parity conditions and governance of the multinational and its foreign partners. Froot, Scharfstein and Stein's work on why firms manage risk sets up the hedging modules that follow. The company and rates here are illustrative composites. Expect to read direct and indirect quotes, compute cross rates and bid-ask spreads, and discuss governance of a foreign partner. Use current quotes with dates. Questions often ask you to compute cross rates and forward premiums, test interest rate parity with real quotes and discuss how governance differs across countries.
How this FIN 3340 Module 2 example is built
The paper explains how the market is organized and the difference between spot and forward trades. It then reads a bank's peso quote, converts it to a direct quote and measures the spread's cost on the actual sale. A cross rate is computed for a second currency the firm uses, with the arbitrage that enforces it. A table sets out the three parity conditions and what each implies for the peso, with a note on their reliability, and the governance section lists contract terms for a foreign distributor. The governance section explains how the partner agreement aligns incentives across borders. Calculations are shown in a short table.
Reading the FIN 3340 Module 2 grading rubric
Parity arithmetic with real quotes carries much of the currency markets grade. Mentors look for correct reading and conversion of quotes, accurate spread and cross rate calculations, a sound explanation of the parity conditions with their limits and governance recommendations grounded in the course. Because the midterm tests the same skills in problems and essays, clear setup of every calculation and APA citations, as the syllabus requires, are expected. Answers that compute quotes correctly and explain agency problems in a cross-border relationship show the module's two themes. Mentors also credit a clear explanation of the bid-ask spread as the dealer's margin.
FIN 3340 Module 2 help: mistakes that cost marks
Foreign exchange answers lose points for confusing direct and indirect quotes, for applying the wrong side of the bid-ask spread and for treating purchasing power parity as a short-run forecast. State the quotation convention before every calculation. Use the bank's less favorable rate for the firm's transaction. Compute cross rates through a common currency. Give each parity condition along with how well it holds in the data. A free first sample of your own FIN-3340 Module 2 assignment is available on request. State whether each quote is direct or indirect before converting it. Check every cross rate by converting back to the original currency, and explain what the partner agreement does about monitoring.
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FIN 3340 Module 2 questions, answered
Where can I find a free FIN 3340 Module 2 sample paper?
The deck oven exporter paper above reads peso quotes, prices a bid-ask spread, computes a cross rate, applies the parity conditions and sets governance terms for a foreign distributor.
What is the difference between a direct and an indirect quote?
A direct quote gives the home-currency price of one unit of foreign currency; an indirect quote gives foreign currency per unit of home currency.
How is a cross rate calculated?
By dividing or multiplying two exchange rates that share a common currency, usually the dollar.
Does purchasing power parity hold?
Poorly in the short run, but it describes the long-run tendency of exchange rates to offset inflation differences.
What is interest rate parity?
A currency's forward premium or discount matches the gap between the two interest rates.