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INTERNATIONAL FINANCE

INTERNATIONAL FINANCE. PRESENTATION BY Ashalakshmi.R.K. FOREIGN EXCHANGE MARKET. It is a Market Dealing with currencies Buying and selling against each other Mostly transactions through electronic funds transfer system Largest market. PART I. INTRODUCTION. I. INTRODUCTION

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INTERNATIONAL FINANCE

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  1. INTERNATIONAL FINANCE PRESENTATION BY Ashalakshmi.R.K

  2. FOREIGN EXCHANGE MARKET • It is a Market • Dealing with currencies • Buying and selling against each other • Mostly transactions through electronic funds transfer system • Largest market

  3. PART I. INTRODUCTION I. INTRODUCTION A. The Currency Market: • Where money denominated in one currency is bought and sold with money denominated in another currency.

  4. B. International Trade and Capital Transactions: - Facilitated with the ability to transfer purchasing power between countries

  5. Important component is the foreign exchange market • Various commercial and financial transactions between countries

  6. Result is receipts and payments Items included are: • Trade , travel, transportation, royalties, • Fees, investment income, unilateral transfers, • Short-term and long-term capital receipts and payments etc

  7. Bank purchase and sale: • Case:Transaction from a country having rupees as currency • A).Sale of rupees for dollars(importer)- conversion of home currency into foreign currency

  8. B). Purchase of rupees for dollars(exporter)- • Conversion of foreign currency into home currency

  9. In 2008 daily turnover in the market was around 1400billion USD • Major currencies are: • USD, Deutschemark, yen , Swiss franc , • Canadian dollar, Dutch guilder, Italian lira, • Pound sterling and Belgian franc

  10. Shares of currencies in US market: • Dmark:34.2% • Yen:23% • PSterling:18.6% • SFranc:9.7% • CDollar:4.2%

  11. 1999 EURO came into existence • Foreign exchange market is an OTC Market • OTC –no single market place , • No organized exchange(electronic or physical)

  12. PROCESS • Traders sit in offices(foreign exchange dealing rooms) of major commercial banks • Communicate -telephones , telexes, computer terminals and other electronic means • Market span-round the clock

  13. Major markets • London • New York • Tokyo • Other centers are: Zurich, Frankfurt, Hong Kong and Singapore

  14. Structures of foreign exchange market • Retail market: • Travelers and tourist exchange currency • Form of exchange :currency notes, cheque

  15. Wholesale market: • Also known as interbank market • Participants are commercial banks, investment banks, corporation and central banks

  16. Wholesale market include primary price makers or professional dealers • Two way market to each other and to clients

  17. Quote two way price • Prepared to take either buy or sell • Mainly include commercial banks, large investment dealers and large corporations

  18. Primary dealer sell USD against Euro • Offset it through buying USD against the Euro • Retail market includes secondary price makers • Buy foreign currency in payment of bills • E.g.: Restaurants hotels and shops catering to tourists

  19. C. Location 1. OTC-type: no specific location 2. Most trades by phone, telex, or SWIFT SWIFT: Society for Worldwide Interbank Financial Telecommunications

  20. ORGANIZATION OF THE FOREIGN EXCHANGE MARKET I . PARTICIPANTS IN THE FOREIGN EXCHANGE MARKET A. Participants at 2 Levels 1. Wholesale Level (95%) - major banks 2. Retail Level - business customers.

  21. ORGANIZATION OF THE FOREIGN EXCHANGE MARKET B. Two Types of Currency Markets 1. Spot Market: - immediate transaction - recorded by 2nd business day

  22. 2. Forward Market: - transactions take place at a specified future date

  23. C. Participants by Market 1. Spot Market a. commercial banks b. brokers c. customers of commercial and central banks

  24. 2. Forward Market a. arbitrageurs b. traders c. hedgers d. speculators

  25. II. CLEARING SYSTEMS A. Clearing House Interbank Payments System (CHIPS) - used in U.S. for electronic fund transfers

  26. B. Fed Wire - operated by the Fed - used for domestic transfers

  27. III. ELECTRONIC TRADING A. Automated Trading - genuine screen-based market

  28. B. Results: 1. Reduces cost of trading 2. Threatens traders’ oligopoly of information 3. Provides liquidity

  29. B. Market Centers (2007): London = $964 billion daily New York= $644 billion daily Tokyo = $361 billion daily

  30. THE SPOT MARKET I. SPOT QUOTATIONS A. Sources 1. All major newspapers 2. Major currencies have four different quotes: a. spot price b. 30-day c. 90-day d. 180-day

  31. B. Method of Quotation 1. For interbank dollar trades: a. American terms example: $.5838/dm b. European terms example: dm1.713/$

  32. 2. For non-bank customers: Direct quote Gives the home currency price of one unit of foreign currency. EXAMPLE: dm0.25/FF

  33. 3.Transactions Costs 1. Bid-Ask Spread used to calculate the fee charged by the bank • Bid = the price at which the bank is willing to buy • Ask = the price it will sell the currency

  34. 4. Percent Spread Formula (PS):

  35. D. Cross Rates 1. The exchange rate between 2 non - US$ currencies.

  36. IV. SIZE OF THE MARKET A. Largest in the world 2005: $3.2 trillion daily

  37. Mechanics of currency trading • The International Standards Organization developed three letter codes • Selected currencies , examples: • USD: US dollar , GBP: British pound • JPY: Japanese yen, • CAD: Canadian dollar, EUR: Euro • CHF: Swiss franc, AUD: Australian dollar

  38. SEK : Swedish kroner, • BEF: Belgian franc , FRF: French franc, • ESP: Spanish peseta, • INR: Indian rupee • DEM :Deutsche mark • ITL: Italian lira • SAR :Saudi Riyal

  39. Interbank dealing: • Market of mutual accommodation • Includes primary dealers • Dealer show a two way quote only if: • He or she extends that privilege to fellow dealers when they call for a quote

  40. Example of a spot transaction • Monday, 21 Sept. 10.45 am • Bank A: Bank A calling.EUR-DLR35 please…….. • (Bank A dealer is asking for Euro Vs. US dollar quote. He /she specifies the size of deal)-to buy Euro

  41. Bank B :40-45 • (Bank B is specifying two –way price ,the price at which it will buy a US Dollar against French Franc and sell USD ……………….)

  42. Bank B quotes the last two decimals of the full quotation (40-45) • For e.g. full quotation might be .8740/.8745 • Bank B will pay USD .8740 its ‘bid rate’-buy

  43. It sells Euro at USD.8745 its ‘ask rate’ • Last two decimals amount to hundredths of a hundredth • Are called ‘points’ or ‘pips’

  44. Difference between ask price and bid price (spread) is .0005 or 5 ‘pips’ • If caller had been a corporate customer, dealer have given full quote) • BANK A: “Mine”

  45. ( Bank A dealer finds bank B’s price acceptable and wishes to buy EUR35million. ) • ‘Mine’ means I buy the specified quantity at your specified price………………………….

  46. If she/he wished to sell , it should be (“yours”) • Bank B: OK, I sell you EUR 35 million against USD AT .8745 value 23 September.

  47. CITY NY for my USD (specify where it would like its USD to be transferred) • BANK A : COMMERZBANK F’ Furt for my EUR. • Thanks and bye

  48. Foreign Exchange • Deals with the means and methods by which rights to income and wealth in one country’s currency are converted into similar rights in terms of another country’s currency • Exchanges in the form of one currency to another or

  49. Credit instruments denominated in different currencies as cheque , drafts, • Airmail transfers, fax and • Telegraphic transfers, cable transfers,

  50. Bills of exchange, trade bills, • Banker’s bill or • Any promissory notes

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