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Part Four World Financial Environment: Chapter Nine Global Foreign-Exchange Markets

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40 views14 pages

Part Four World Financial Environment: Chapter Nine Global Foreign-Exchange Markets

ib

Uploaded by

AdityaDhanrajSingh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Part Four

World Financial Environment


Chapter Nine
Global Foreign-Exchange Markets

Copyright 2009 Pearson Education, Inc.

9-1

Chapters Objectives
To learn the fundamentals of foreign exchange
To identify the major characteristics of the
foreign exchange market and how governments
control the flow of currencies across national
borders
To describe how the foreign exchange market
works
To examine the different institutions that deal in
foreign exchange
To understand why companies deal in foreign
exchange
Copyright 2009 Pearson Education, Inc.

9-2

Foreign Exchange
Foreign exchange is money denominated
in the currency of another nation or group
of nations
The market in which these transactions
take place is the foreign-exchange market.
The exchange rate is the price of a
currency

Copyright 2009 Pearson Education, Inc.

9-3

The Foreign Exchange


The Bank for International Settlements divides
the foreign exchange market into reporting
dealers (also known as dealer banks or money
center banks), other financial institutions, and
nonfinancial institutions.
Dealers can trade currency by telephone or
electronically, especially through Reuters, EBS,
or Bloomberg
The foreign exchange market is divided into the
over-the-counter market (OTC) and the
exchange-traded market
Copyright 2009 Pearson Education, Inc.

9-4

Some Traditional Foreign Exchange


Instruments
Spot transactions involve the exchange of
currency on the second day after the date on
which the two dealers agree to the transaction
Outright forward transactions involve the
exchange of currency three or more days after
the date on which the dealers agree to the
transaction
An FX swap is a simultaneous spot and forward
transaction
Copyright 2009 Pearson Education, Inc.

9-5

Foreign Exchange Derivatives


Currency swaps deal more with interest-bearing
financial instruments (such as a bond), and they
involve the exchange of principal and interest
payments.
Options are the right but not the obligation to
trade foreign currency in the future.
A futures contract is an agreement between two
parties to buy or sell a particular currency at a
particular price on a particular future date.
Copyright 2009 Pearson Education, Inc.

9-6

Some Aspects
Of The Foreign Exchange Market
Approximately $3.2 trillion in foreign
exchange is traded every day.
The US dollar is the most widely traded
currency in the world (on one side of 86%
of all transactions)
London is the main foreign exchange
market in the world

Copyright 2009 Pearson Education, Inc.

9-7

Why the US dollar is the most widely


traded currency
An investment currency in many capital markets.
A reserve currency held by many central banks.
A transaction currency in many international
commodity markets.
An invoice currency in many contracts.
An intervention currency employed by monetary
authorities in market operations to influence their
own exchange rates.

Copyright 2009 Pearson Education, Inc.

9-8

The Spot Market


Foreign exchange dealers quote bid (buy) and
offer (sell) rates on foreign exchange
If the quote is in American terms, the dealer
quotes the foreign currency as the number of
dollars and cents per unit of the foreign currency
If the quote is in European terms, the dealer
quotes the number of units of the foreign
currency per dollar
The numerator is called the terms currency and
the denominator the base currency.
Copyright 2009 Pearson Education, Inc.

9-9

The Forward Market


If the foreign currency in a forward contract is
expected to strengthen in the future (the dollar
equivalent of the foreign currency is higher in the
forward market than in the spot market), the
currency is selling at a premium. If the opposite
is true, it is selling at a discount
An option is the right, but not the obligation, to
trade foreign currency in the future
Options can be traded OTC or on an exchange
Copyright 2009 Pearson Education, Inc.

9-10

Futures
A foreign currency future is an exchangetraded instrument that guarantees a future
price for the trading of foreign exchange,
but the contracts are for a specific amount
and specific maturity date

Copyright 2009 Pearson Education, Inc.

9-11

The Foreign Exchange Trading


Process
Companies work with foreign exchange
dealers to trade currency
Dealers also work with each other and can
trade currency through:
voice brokers
electronic brokerage services
directly with other bank dealers

Internet trades of foreign exchange are


becoming more significant
Copyright 2009 Pearson Education, Inc.

9-12

How Companies Use Foreign


Exchange
The major institutions that trade foreign
exchange are the large commercial and
investment banks and securities exchanges
Commercial and investment banks deal in a
variety of different currencies all over the world
The CME Group and the Philadelphia Stock
Exchange trade currency futures and options

Copyright 2009 Pearson Education, Inc.

9-13

How Companies Use Foreign


Exchange
Companies use foreign exchange to settle
transactions involving the imports and
exports of goods and services, for foreign
investments, and to earn money through
arbitrage or speculation

Copyright 2009 Pearson Education, Inc.

9-14

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