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Topic 08 FOREX Markets

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21 views

Topic 08 FOREX Markets

Uploaded by

tarmacbean
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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International

Business,
8th Edition
Griffin & Pustay

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-1


Learning Objectives

 Describe how demand and supply determine


the price of foreign exchange
 Discuss the role of international banks in the
foreign-exchange market
 Assess the different ways firms can use the
spot and forward markets to settle
international transactions
 Summarize the role of arbitrage in the
foreign-exchange market
 Discuss the important aspects of the
international capital market
COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-2
The Economics of Foreign Exchange

 Foreign exchange: a commodity that


consists of currencies issued by countries
other than one’s own.
 Price of foreign exchange: set by
demand and supply in the marketplace.
(given a flexible exchange rate system)

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-3


The Economics of Foreign
Exchange: Demand for Yen

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-4


The Economics of Foreign
Exchange: Supply of Yen

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-5


The Economics of Foreign
Exchange: The Market for Yen

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-6


The Economics of Foreign Exchange:
Foreign Exchange Rate Quotes

 Direct Exchange Rate (or Direct Quote)


 Indirect Exchange Rate (or Indirect Quote)

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8- 7


Structure of the Foreign Exchange
Market

 Volume of foreign-exchange trading is


estimated at $5.3 trillion per day
 The largest foreign-exchange markets are
in London, New York, Singapore, and Tokyo
 Approximately 87% of the transactions
involve the U.S. dollar
 U.S. dollar is the primary transaction
currency for the foreign-exchange market

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-8


Structure of the Foreign Exchange
Market

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-9


Structure of the Foreign Exchange
Market: The Role of Banks
 Major Players  International
International Banks Banks
Corporate Spread between
Treasurers the Bid and Ask
Pension Funds Prices
Hedge Funds Wholesale Market
Insurance Retail Market
Companies Interbank
Central Banks Transactions
Treasury
Departments
COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-10
Structure of the Foreign Exchange
Market: The Role of Banks

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-11


Structure of the Foreign Exchange
Market: The Role of Banks

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-12


Structure of the Foreign Exchange
Market: Hedging Foreign-exchange Risks

 Spot Market
 Forward Market
 Swap Transaction
 Currency Futures
 Currency Options
Call Option
Put Option

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-13


Structure of the Foreign Exchange
Market: Spot and Forward Markets

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-14


Structure of the Foreign Exchange Market:
Arbitrage and the Currency Market

 Arbitrage of Goods
Law of One Price
Purchasing Power Parity (PPP)
 Arbitrage of Money
Two-Point/Geographic Arbitrage
Three-Point Arbitrage
Covered Interest Arbitrage

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-15


Structure of the Foreign Exchange Market:
Arbitrage and the Currency Market

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-16


International
Capital
Market:
Major
International
Banks

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-17


International Capital Market: Major
International Banks

FORMS SERVICES
Correspondent Commercial Banking
Relationship Services
Subsidiary Bank Investment Banking
Branch Bank Services
Affiliated Bank

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-18


International Capital Market:
Eurocurrency Market

 Eurocurrency
 Euroloan
 London Interbank Offer Rate (LIBOR)
 International Banking Facilities (IBFs)

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-19


International Capital Market:
International Bond Market

 Foreign Bonds
 Eurobonds
 Global Bonds

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-20


International Capital Market: Global
Equity Markets

 Capital Markets
 Country Funds
 Financial Services

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-21


International Capital Market: Offshore
Financial Centers

 Political Stability
 Regulatory Climate
 Communications Links
 Other Expertise

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-22


Review Questions

 What determines the demand for any given


currency in the foreign-exchange market?
 What determines the supply of any given
currency in the foreign-exchange market?
 How are prices established in the foreign-
exchange market?
 What is the role of international banks in the
foreign-exchange market?
 Explain the different techniques that firms
can use to protect themselves from future
changes in exchange rates.
COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-23
Review Questions (Cont.)

 Discuss the major types of arbitrage


activities that affect the foreign-exchange
market.
 Describe the various forms a bank’s
overseas operations may take.
 What are Eurocurrencies?
 What are the major characteristics of
offshore financial centers?

COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-24


COPYRIGHT © 2015 PEARSON EDUCATION, INC. Chapter 8-25

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