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The Foreign Exchange Market

The Foreign Exchange Market. International Business (MB 92). The Foreign Exchange Market. Characteristics 24 Hour Global OTC Market Principal Centers Tokyo London New York Volume: $1.3 trillion daily, up from $100 billion in the 1980s Main Participants Users Market Makers.

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The Foreign Exchange Market

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  1. The Foreign Exchange Market International Business (MB 92)

  2. The Foreign Exchange Market • Characteristics 24 Hour Global OTC Market • Principal Centers • Tokyo London New York • Volume: $1.3 trillion daily, up from $100 billion in the 1980s • Main Participants Users Market Makers

  3. Participants • Users • Multinationals • Institutional Investors • Speculators—92% of the daily market activity driven by speculation • Trading Companies • Individuals • Market Makers • Commercial Banks • Investment Banks • Central Banks • Exchanges

  4. Major Trading Centers Percentage of Market London 32% New York 18% Tokyo 8% Singapore 7% Europe 55% Asia 26% North America 19%

  5. Currency Composition

  6. Types of Instruments in the FX Market

  7. Types of Foreign Exchange Trades • Spot Trade--The Standard Trade For delivery of currency bought and sold two business days from trade date • Forward Trade For delivery of both currencies more than two business days from trade date • Swap Trade Simultaneous buying and selling of a currency with different maturities (usually from spot to a forward date)

  8. Exchange Rate Quotations • “Direct,” “American,” or “Normal Quotations • ¥1 = $0.007547 • THB1 = $0.02265 Price of domestic currency per unit of foreign currency • “Indirect,” “European,” “Reciprocal”, or “Volume” Quoatations • $1 = ¥132.50 • $1= THB44.15 Effectively quotes the volume of foreign currency purchased by fixed quantity of domestic currency

  9. Currency Prices Spot • Agree on price today, settle two business days later Bid Offer Yen per US $ 134.42 134.60 Trader Buys US $ Sells US $ Client Sells US $ Buys US $ Thai Baht/$ 44.15 44.19 Trader Buys US $ Sells US $ Client Sells US $ Buys US $

  10. Currency Prices Bid Offer U.S. Dollar/¥ 0.007541 0.007547 Trader Buys ¥ Sells ¥ Client Sells ¥ Buys ¥ U.S. Dollar/THB 0.02263 0.02265 Trader Buys THB Sells THB Client Sells THB Buys THB

  11. Exchange Rate Determination • Meaning of Exchange Rate • Appreciation/Depreciation of a Currency • Determination of Exchange Rates—Forces of Demand and Supply • Factors that influence exchange rates • Inflation Rates • Interest Rates • Income Levels • Government Controls

  12. Exchange Rate Systems • Fixed Exchange Rate Systems • Floating Exchange Rate Systems • Managed Float • Pegged Exchange Rate Systems

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