Help 3 Foreign Exchange Markets

8/7/2019 Help 3 Foreign Exchange Markets

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THE FOREIGN EXCHANGE

MARKET


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I. INTRODUCTION

II. ORGANIZATION OF THE OF THE FOREIGN

EXCHANGE MARKET

III. THE SPOT MARKET

1V. THE FORWARD MARKET

V. INTEREST RATE PARTY THEORY


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A. The Currency Market: Where

money denominated in one

currency is bought and soldwith money denominated in

another currency.

B.

International Trade andCapital Transactions

C. Location


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I. PARTICIPANTS IN THE FOREIGN

EXCHANGE MARKET

A.Participants at 2 Levels

1.Wholesale Level (95%)

(Major banks).

2.Retail Level(Business customers).


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B. W YP S U Y S

1. t ar et: I ediate tra sacti .

2. rward ar et: ra sacti s ta e lace at a

s ecified f t re date.


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A. Clearing House Interbank PaymentsSystem (CHIPS)

Used in U.S. for electronic fund

transfers.

B. Fed Wire

Operated by the Fed.

Used for domestic transfers.


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I. SPOT MARKET A market for the immediate purchase

and delivery of currencies.

II. Spot Exchange Rates

Market prices of foreign exchanges inthe spot market that are the ratespertaining to the trading of foreigncurrencydenominated deposits amongmajor banks in amounts of $1 millionand more.


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III. Currency Arbitrage

1. If cross rates differ from one

financial center to another, and profitopportunities exist.

2. Buy cheap in one intl market, sell at a

higher price in another

3. Role of Available Information


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IV. Exchange Risk

1. Bankers = middlemen

a. Incurring risk of adverse exchange

rate moves.

b. Increased uncertainty aboutfuture exchange rate requires

2. Demand for higher risk premium

3. Bankers widen bidask spread


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I. INTRODUCTION

A. Definition of a ForwardContract

An agreement between a bank

and a customer to deliver aspecified amount of currency

against another currency at a

specified future date and at a

fixed exchange rate.


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2. Purpose of a ForwardHedging

The act of reducing exchange rate

risk.

3. Covered Exposure

A foreign exchange risk that has beencompletely eliminated with a hedginginstrument.

Forward contract for foreignexchange

Derivative instruments


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B. FOR ARD RATE Q OTATION

1. Two Methods

a. Outright Rate: Quoted to commercialcustomers.

b. Swap Rate: Quoted in the interbank

market as a discount or premium.


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C. Forward ContractMaturities

1. Contract Terms

a. 30day

b. 90day

c. 180day

d. 360day

2. Longerterm Contracts


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II. Covered Interest Arbitrage

1. Conditions required: Interest rate

differential does not equal theforward premium or discount.

2.Funds will move to a country with a

more attractive rate.


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3. Market pressures develop:

a. As one currency is more

demanded spot and sold

forward.

b. Inflow of fund depressesinterest rates.

c. Party eventually reached.


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From this we concluded that FOREIGNEXCHANGEMARKET plays a very importantrole in the market.

And minor mistake can create a biggestproblems .

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