International

Business
Environments & Operations
14e

Daniels ● Radebaugh ● Sullivan

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 Chapter 9
Global Foreign
Exchange Markets

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 Learning 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
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 Introduction
Learning Objective 1:
To learn the fundamentals of foreign
exchange

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 What Is Foreign Exchange?
 Foreign exchange
 money denominated in the currency of another
nation or group of nations
 Foreign exchange market
 where foreign exchange transactions take
place
 Exchange rate
 the price of a currency

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 Players On The Foreign
Exchange Market
Learning Objective 2:
To identify the major characteristics of the
foreign-exchange market and how
governments control the flow of currencies
across national borders

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 Players On The Foreign
Exchange Market
 The Bank for International
Settlements (BIS) divides the market
into
 Reporting dealers
 Financial institutions
 Nonfinancial institutions

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 Players On The Foreign
Exchange Market
Foreign Exchange Markets: Turnover by Counterparty

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 How To Trade
Foreign Exchange
Learning Objective 3:
To describe how the foreign-exchange
market works

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 How To Trade
Foreign Exchange
 Dealers can trade foreign exchange
 Using electronic methods (41.3%)
 Directly with customers (24.3%)
 Through the interbank market (18.5%)
 Through voice brokers (15.9%)

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 Some Aspects Of The Foreign
Exchange Market
 The foreign exchange market has two
segments
 OTC commercial and investment banks
 Securities exchanges

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 Global OTC
Foreign Exchange Instruments
 Global OTC foreign exchange instruments
include
 Spot transactions
 Outright forward transactions
 FX swap
 Currency swaps
 Options
 Futures contracts

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 Global OTC
Foreign Exchange Instruments
Foreign Exchange Markets: Turnover by Instrument

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Size, Composition, and Location
of the Foreign Exchange Market
 Market size is $4 trillion daily
 the U.S. dollar is the most important currency
on the foreign-exchange market
 London is the main foreign exchange market in
the world
 The most commonly traded currency pairs
are EUR/USD and USD/JPY

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Size, Composition, and Location
of the Foreign Exchange Market
Foreign Exchange Markets: Average Daily Volume 1998-2010

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Size, Composition, and Location
of the Foreign Exchange Market
Global Foreign Exchange: Currency Distribution

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Size, Composition, and Location
of the Foreign Exchange Market
Foreign Exchange Markets: Geographic Distribution

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 Major Foreign
Exchange Markets
 Foreign exchange dealers quote rates
 Bid (buy) rate
 the rate at which traders buy foreign exchange

 Offer (sell) rate

 the rate at which traders sell foreign exchange

 Spread
 the difference between bid and offer rates

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 Major Foreign
Exchange Markets
 American terms (direct quote)
 the number of dollars per unit of foreign currency
 European terms (indirect quote)
 the number of units of foreign currency per dollar
 Base currency
 Terms currency

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 The Forward Market
 Forward discounts
 when the forward rate is less than the spot rate
 Forward premiums
 when the forward rate is greater than the spot rate
 Option
 the right, but not the obligation, to trade a foreign
currency at a specific exchange rate
 Futures
 specifies an exchange rate in advance of the
actual exchange of currency
 not as flexible as a forward contract

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The Foreign Exchange
Trading Process
The Foreign Exchange Trading Process

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 Banks And Exchanges
 The top banks in the inter-bank market in
foreign exchange can
 trade in specific market locations
 engage in major currencies and cross-trades
 deal in specific currencies
 handle derivatives
 forwards, options, futures, swaps

 conduct key market research

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 Banks And Exchanges
Foreign Exchange Trades: Top Commercial Banks, 2011
Ranked by Overall Market Share

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 Top Exchanges For Trading
Foreign Exchange
 Three of the best-known exchanges are
 the Chicago Mercantile Exchange (CME)
Group
 the NASDAQ OMX
 the NYSE Liffe

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 How Companies
Use Foreign Exchange
Learning Objective 5:
To understand why companies deal in
foreign exchange

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 How Companies
Use Foreign Exchange
 Import and export cash flow options
 Commercial bills of exchange
 sight draft

 time draft

 Letters of credit
 confirmed letter of credit

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 How Companies
Use Foreign Exchange
 Other financial flows for business
 Speculation
 buying or selling of a foreign currency that

has an element of risk and a chance of great

profits
 Arbitrage
 the buying and selling of foreign currencies

at a profit due to price discrepancies

 interest arbitrage

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 Where Are Foreign Exchange
Markets Headed?
 More efficient markets
 create more opportunities for foreign exchange
trading
 lower costs
 Financial crisis in Europe
 future of the euro
 Rise of the Chinese yaun and Brazilian real
 Technology developments
 more electronic trades

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mechanical, photocopying, recording, or otherwise, without the prior
written permission of the publisher. Printed in the United States of America.

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