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International Business

International Business. Chapter Nine Global Foreign Exchange Markets. Foreign Exchange Market. Foreign exchange is market volume growth is substantial: about $4 trillion in 2010 from $1.2 trillion in 2001.

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International Business

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  1. International Business Chapter Nine Global Foreign Exchange Markets

  2. Foreign Exchange Market • Foreign exchange is market volume growth is substantial: about $4 trillion in 2010 from $1.2 trillion in 2001. • US dollar is most widely traded currency in the world involving in 85% of all transactions in 2010. • 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. • Role of Bank of International Settlements (BIS)

  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 9.5The 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. Few Foreign Exchange 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

  7. Foreign Exchange Transactions • Spot transactions: are for immediate delivery of the currency, within two days maximum. • Forward transactions: involve currency exchange beyond three days at a fixed rate, known as the forward rate. • FX Swaps: 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.

  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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