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International Business

International Business. Chapter Nine Global Foreign Exchange Markets. Foreign Exchange-A Few facts. Foreign exchange is used to buy and sell foreign exchange and serve as vehicles for payments. US dollar is most widely traded currency in the world involving in 86% of all transactions in 2007.

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International Business

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  1. International Business Chapter Nine Global Foreign Exchange Markets

  2. Foreign Exchange-A Few facts • Foreign exchange is used to buy and sell foreign exchange and serve as vehicles for payments. • US dollar is most widely traded currency in the world involving in 86% of all transactions in 2007. • London is the largest foreign exchange market (followed by New York, Tokyo, and Singapore) because of its strategic location between Asia and the Americas. • Market activity first heightens when Europe and Asia are open and again when Europe and the United States are open. • Electronic platforms made foreign currency transactions easier. • Businesses use FX for exports/imports, investments, loans etc.

  3. Foreign Exchange-A Few facts • Foreign exchange is demanded by the individuals, companies, and governments who buy it from many players like - Foreign Exchange Dealers (e.g, Thomas Cook) - Banks (e.g., BOA, Citi, JP Morgan, HSBC) - Financial Institutions (e.g., Western Union) • Some of the popular markets are: • Chicago Mercantile Exchange (CME): offers futures and futures options contracts, mostly involved in commodity trade. • Philadelphia Stock Exchange (PHLX): pioneers in trading foreign currency options. • London International Exchange: mostly covers intra-European trading and European trading with rest of the world.

  4. Figure 9.4The Circadian Rhythms of the Foreign Exchange Market

  5. Five reasons why U.S. dollar is so widely traded • It is an investment currency in many capital markets • It is a reserve currency held by many central banks • It is a transaction currency in many international commodity markets • It is an invoice currency in many contracts • It is an intervention currency employed by monetary authorities in market operations to influence their own exchange rates

  6. Foreign Exchange Transactions • Spot transactions: are for immediate delivery of the currency, within two days maximum. • Outright forward transactions: involve currency exchange beyond three days at a fixed rate, known as the forward rate. • FX swap: is exchange of currencies in the spot market with agreement to reverse the transaction in the future. It is a combination of spot and forward transaction at the same time. • Options are contracts specifying the right to buy or sell foreign exchange within a specific period or on a specific date. • Futures are contracts for forward delivery of currency for specific amounts with specific maturity dates.

  7. A Few More FX Terms • Bid: the rate at which traders buy foreign currency • Offer: the rate at which traders sell foreign exchange • Spread: the difference between bid and offer rates; the profit margin for the trader • Cross rate: determines the rate between two foreign currencies

  8. Chapter 9: Discussion Questions • Explain the foreign exchange market. Why U.S. dollar is the most traded currency in the world? • Define the following terms and distinguish their differences: spot rate, forward rate, options, futures and swap. • Define the following terms and distinguish their differences: bid, offer, spread, and cross rate.

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