Chapter Four The market for 4 Foreign Exchange Chapter objectives This chapter serves to introduce the student to the institutional framework within which exchange rates are determined This chapter lays the foundation for much of the discussion throughout the remainder of the text, thus it deserves your careful attention
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 4 Chapter Four The Market for Foreign Exchange Chapter Objectives: •This chapter serves to introduce the student to the institutional framework within which exchange rates are determined. •This chapter lays the foundation for much of the discussion throughout the remainder of the text, thus it deserves your careful attention
Chapter outline o Function and structure of the forex market ° The spot market The Forward market McGraw-Hilylrwoin 4-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-1 Chapter Outline ⚫ Function and Structure of the FOREX Market ⚫ The Spot Market ⚫ The Forward Market
Chapter outline o Function and structure of the forex market FX Market Participants Correspondent Banking Relationships ● The Spot market ● The Forward market McGraw-Hilylrwoin 4-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-2 Chapter Outline ⚫ Function and Structure of the FOREX Market ◼ FX Market Participants ◼ Correspondent Banking Relationships ⚫ The Spot Market ⚫ The Forward Market
Chapter outline o Function and structure of the foreX market ● The spot market a Spot rate Quotations The Bid-Ask Spread Spot FX Trading Cross Exchange Rate Quotations Triangular Arbitrage Spot Foreign exchange market Microstructure ● The Forward market McGraw-Hilylrwoin 4-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-3 Chapter Outline ⚫ Function and Structure of the FOREX Market ⚫ The Spot Market ◼ Spot Rate Quotations ◼ The Bid-Ask Spread ◼ Spot FX Trading ◼ Cross Exchange Rate Quotations ◼ Triangular Arbitrage ◼ Spot Foreign Exchange Market Microstructure ⚫ The Forward Market
Chapter outline o Function and structure of the foreX market ● The Spot market The Forward market a Forward Rate Quotations Long and short Forward positions Forward Cross-Exchange Rates Swap transactions forward Premium McGraw-Hilylrwoin 4-4 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-4 Chapter Outline ⚫ Function and Structure of the FOREX Market ⚫ The Spot Market ⚫ The Forward Market ◼ Forward Rate Quotations ◼ Long and Short Forward Positions ◼ Forward Cross-Exchange Rates ◼ Swap Transactions ◼ Forward Premium
The Function and structure of the FOREX Market e FOREX Market Participants Correspondent banking relationships McGraw-Hilylrwoin 45 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-5 The Function and Structure of the FOREX Market ⚫ FOREX Market Participants ⚫ Correspondent Banking Relationships
FOREX Market Participants The foreX market is a two-tiered market Interbank Market (Wholesale) o about 700 banks world wide stand ready to make a market in Foreign exchange o Nonbank dealers account for about 20% of the market e There are fx brokers who match buy and sell orders but do not carry inventory and FX specialists Client Market (Retail o Market participants include international banks, their customers non bank dealers foreX brokers. and central banks McGraw-Hilylrwoin 4-6 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-6 FOREX Market Participants ⚫ The FOREX market is a two-tiered market: ◼ Interbank Market (Wholesale) ◆About 700 banks worldwide stand ready to make a market in Foreign exchange. ◆Nonbank dealers account for about 20% of the market. ◆There are FX brokers who match buy and sell orders but do not carry inventory and FX specialists. ◼ Client Market (Retail) ⚫ Market participants include international banks, their customers, nonbank dealers, FOREX brokers, and central banks
Correspondent Banking relationships Large commercial banks maintain demand deposit accounts with one another which facilitates the efficient functioning of the forex market o International commercial banks communicate with one another with SWIFT: The Society for Worldwide Interbank Financial Telecommunications CHIPS: Clearing House Interbank Payments system ECHO Exchange Clearing House Limited, the first global clearinghouse for settling interbank ForEX transactions McGraw-Hilylrwoin 4-7 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-7 Correspondent Banking Relationships ⚫ Large commercial banks maintain demand deposit accounts with one another which facilitates the efficient functioning of the forex market. ⚫ International commercial banks communicate with one another with: ◼ SWIFT: The Society for Worldwide Interbank Financial Telecommunications. ◼ CHIPS: Clearing House Interbank Payments System ◼ ECHO Exchange Clearing House Limited, the first global clearinghouse for settling interbank FOREX transactions
The Spot market ● Spot rate Quotations o The bid-Ask spread ° Spot FX trading ● Cross rates McGraw-Hilylrwoin 4-8 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-8 The Spot Market ⚫ Spot Rate Quotations ⚫ The Bid-Ask Spread ⚫ Spot FX trading ⚫ Cross Rates
Spot rate Quotations e Direct quotation the u.s. dollar equivalent e.g. a Japanese Yen is worth about a penny ● Indirect Quotation the price of a U.s. dollar in the foreign currency e. g. you get 100 yen to the dollar McGraw-Hilylrwoin 4-9 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-9 Spot Rate Quotations ⚫ Direct quotation ◼ the U.S. dollar equivalent ◼ e.g. “a Japanese Yen is worth about a penny” ⚫ Indirect Quotation ◼ the price of a U.S. dollar in the foreign currency ◼ e.g. “you get 100 yen to the dollar
