Professional Documents
Culture Documents
The Foreign Exchange Market
The Foreign Exchange Market
Exchange Market
Chapter 6
INTRODUCTION
INTRODUCTION
C. Location
1. OTC-type: no specific
2. Most trades by phone or
location
SWIFT*
PART II.
ORGANIZATION OF THE
FOREIGN EXCHANGE
IMARKET
. PARTICIPANTS IN THE FOREIGN
EXCHANGE MARKET
A. Participants at 2 Levels
1. Wholesale Level (95%)
- major commercial
banks
2. Retail Level
- banks dealing for
business
customers.
ORGANIZATION OF THE
FOREIGN EXCHANGE
MARKET
B. Two Sub markets of Currency
Markets
1. Spot Market:
- immediate transaction
- recorded by 2nd business day
2. Forward Market:
- transactions take place at a
specified future date
7
ORGANIZATION OF THE
FOREIGN EXCHANGE
MARKET
C. Participants by Market
1.
Spot Market
a. commercial banks
b. brokers
c. customers of commercial
banks
d. central banks
8
ORGANIZATION OF THE
FOREIGN EXCHANGE
MARKET
2. Forward Market
a. arbitrageurs
(hold currency)
b. speculators
c. hedgers
9
ORGANIZATION OF THE
FOREIGN EXCHANGE
MARKET
II. SIZE OF THE CURRENCY MARKET
A. Largest in the world
2005: $1.9 trillion daily
B. Market Centers (1998):
London =
$637 billion daily
New York= $351 billion daily
Tokyo = $149 billion daily
C.
Benchmark: 1999 USGDP = $9.1
trillion
10
PART III.
THE SPOT MARKET
I. SPOT QUOTATIONS
A. Sources
1. All major newspapers
2. Major currencies have
different quotes:
a.
b.
c.
d.
four
spot price
30-day
90-day
180-day
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Transactions Costs
1.
Bid-Ask Spread
used to calculate the fee
charged by the broker
2.
3.
buy
will sell
13
14
15
Sample Problem
Suppose the spot quote for the Swedish
krona is $.1395-99, what is the percent
spread?
PS = Ask Bid x 100
Ask
= .1399 - .1395 x 100
.1399
= .29% or 29 basis points
16
between
2.
Purpose: to identify
arbitrage opportunities
17
Sample Problem
$.1133
SF = _SF_ = 8.826 x US$
=8.826
kr
$.1395
US$ 7.168
7.168
kr
= SF1.23/kr
18
The Impact of
Arbitrage
19
20
CURRENCY ARBITRAGE
What is The Critical Role of
Arbitrage in the Global Financial
Markets?
21
PART III.
THE FORWARD
MARKET
I. INTRODUCTION
A. Definition of a Forward Contract
an agreement between a bank and
customer to buy or sell
1. a specified amount of currency
against another currency
2. at a specified future date and
3. at a fixed exchange rate.
22
THE FORWARD
MARKET
2. Purpose of a Forward:
Hedging
the process of reducing or
mitigating exchange
rate risk.
23
Hedging Tools
Type
Contract Features
Forward 1.
Future 2.
Fixed currency
amount
Fixed exchange rate
Option
3.
24
THE FORWARD
MARKET
C. Forward Contracts Require
performance by both parties
1. Contract Terms may be
a.
b.
c.
d.
2.
30-day
90-day
180-day
360-day
Longer-term Contracts possible
25
P or D = F-S x 12 x 100
S
n
Alternate= F-S x 360 x 100
S
n
where
F = the forward rate of exchange
S = the spot rate of exchange
n = the number of months or
days in the forward contract
26
Sample Problem
F S 12
x
x100
S
n
1.4511 1.4487 12
x
x100
1.4487
3
.66%
27
Sample Problem
What is the forward discount or
premium if the 30 day forward rate
is $1.4498/ and the spot is
$1.4487/
?
F S 360
x100
S
n
1.4498 1.4487 360
x
x100
1.4487
30
.91%
28