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1.–2. Foreign Exchange Markets

1.–2. Foreign Exchange Markets. International Financial Services Karel Bruna. Main Business Problems. the role of bank/company in foreign exchange market main sources of risk to which bank/company face up main trends in foreign exchange markets

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1.–2. Foreign Exchange Markets

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  1. 1.–2. Foreign Exchange Markets International Financial Services Karel Bruna

  2. Main Business Problems • the role of bank/company in foreign exchange market • main sources of risk to which bank/company face up • main trends in foreign exchange markets • effective ways how to manage foreign exchange transactions

  3. Main Features of the Foreign Exchange Market • place of trade concentration (geographical extent) • trading channels • participants (institutions) • type of transaction • motivation for transaction • conventions in exchange rate quotation

  4. Foreign Exchange Markets Geography

  5. USD in Foreign Reserves

  6. The Circadian Rhythms of the FX Markets

  7. Main Trading Channels in FX Market Interbank Market Client Market direct tradingsingle-bank systems Reuters Dealing 3000 Direct Chief Dealer (Citibank) EBS Trader NatWest Global Banking & Markets electronic brokersmulti-bank systems Reuters Dealing 3000 Spot Fxall, Currenex, eSpeed, EBS Spot 360 Treasury System, Lava FX FX Connect e-exchangee-exchange FXMarketSpace HotSpotFX

  8. Example of Dealer’s Conversation From “CODE” “FULL NAME HERE” *0728GMT 030801 */7576 Our Terminal: “CODE” Our Users: “FULL NAME HERE” EUR 10 # 25.27 BA> I BUY # TO CONFIRM AT 1,0227 I SELL 10 MIO USD # VAL 5AUG01 # MY EUR TO “FULL NAME HERE” # THANKS AND BYE TO CONFIRM AT 1,0227 I BUY 10 MIO USD VAL 5AUG01 MY USD TO “FULL NAME HERE” THANKS FOR DEAL FRDS. CHEERS # #END REMOTE# # #END#

  9. EBS Spot Electronic Broker

  10. HotSpot FX

  11. Volume of Transactions Traded Online(Gtnews Online Trading Survey, 2004)

  12. Primary Benefits of E-Trading in FX Market(State Street Global Market Survey, 2005)

  13. % Share and dynamics in main segments of dealer-to-client market(2005, ClientKnowledge, 2006)

  14. Motivation for Transaction in Foreign Exchange Market • change of purchasing power • speculation • hedging • arbitrage

  15. Exchange Rate QuotationEuropean quotation outright quotation small figure base currency 24,264 CZK/EUR European quotation quoted currency big figure

  16. Exchange Rate QuotationAmerican quotation outright quotation small figure base currency 0,04122EUR/CZK American quotation quoted currency big figure

  17. Exchange Rate QuotationEuropean vs. American quotation 1 European quotationBID = -------------------------------- American quotationASK 1 European quotationASK = -------------------------------- American quotationBID

  18. Exchange Rate QuotationDirect quotation base currency = foreign currency 18,534 CZK/USD quoted currency = home currency

  19. Exchange Rate QuotationIndirect quotation base currency = home currency 0,0540USD/CZK quoted currency = foreign currency

  20. Exchange Rate Quotation 26,5346 26,5353 CZK/USD 26,5346/53 CZK/USD 46-53 CZK/USD

  21. Main business problems(cross rates) • definition of the strategy of cross rates predictions • cross trades as the source of volatility of company’s future cash flow • company’s management of FX risk in case of cross trades

  22. Cross rateEuropean quotation USD/CHF cross rate rule GBP/CHF = -------------------- USD/GBP USD/CHFBID GBP/CHFBID = -------------------- USD/GBPASK USD/CHFASK GBP/CHFASK = -------------------- USD/GBPBID

  23. Cross rateAmerican quotation GBP/USD cross rate rule GBP/CHF = -------------------- CHF/USD GBP/USDBID GBP/CHFBID = -------------------- CHF/USDASK GBP/USDASK GBP/CHFASK = -------------------- CHF/USDBID

  24. Cross rateEuropean vs. American quotation cross rate rule GBP/CHF = GBP/USD . USD/CHF GBP/CHFBID = GBP/USDBID.USD/CHFBID GBP/CHFASK = GBP/USDASK.USD/CHFASK

  25. Cross rate(majors vs. cross rate majors market share in 2007) majorscross rate majors EUR/USD 27% EUR/JPY 2 % USD/JPY 13 % EUR/GBP 2 % GBP/USD 12 % EUR/CHF 2 %

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