Professional Documents
Culture Documents
CHAPTER OVERVIEW
I. II. INTRODUCTION ORGANIZATION OF THE FOREIGN EXCHANGE MARKET III. THE SPOT MARKET IV. THE FORWARD MARKET V. INTEREST RATE PARITY THEORY
PART I. INTRODUCTION
I. INTRODUCTION A. The Currency Market: where money denominated in one currency is bought and sold with money denominated in another currency.
INTRODUCTION C. Location 1. OTC-type: no specific location 2. Most trades by phone, telex, or SWIFT SWIFT: Society for Worldwide
Interbank Financial Telecommunications
I . PARTICIPANTS IN THE FOREIGN EXCHANGE MARKET A. Participants at 2 Levels 1. Wholesale Level (95%) - major banks 2. Retail Level - business customers.
B. Two Types of Currency Markets 1. Spot Market: - immediate transaction - recorded by 2nd business day
2.
C. Participants by Market 1. Spot Market a. commercial banks b. brokers c. customers of commercial and central banks
II. CLEARING SYSTEMS A. Clearing House Interbank Payments System (CHIPS) - used in U.S. for electronic fund transfers.
B. FedWire
- operated by the Fed
ORGANIZATION OF THE FOREIGN EXCHANGE MARKET III. ELECTRONIC TRADING A. Automated Trading - genuine screen-based market
B. Results:
1. 2. 3. Reduces cost of trading Threatens traders oligopoly of information Provides liquidity
ORGANIZATION OF THE FOREIGN EXCHANGE MARKET IV. SIZE OF THE MARKET A. Largest in the world 1995: $1.2 trillion daily
B. Market Centers (1995): London = $464 billion daily New York= $244 billion daily Tokyo = $161 billion daily
b.
European terms
example: dm1.713/$
EXAMPLE: dm0.25/FF
3.
1. Date monies are due 2. 2nd Working day after date of original transaction.
b.
S = the spot rate of exchange n = the number of months in the forward contract
2.
I. INTRODUCTION A. The Theory states: the forward rate (F) differs from the spot rate (S) at equilibrium by an amount equal to the interest differential (rh - rf) between two countries.
2.