Chapter 1 Spot Exchange Market

Foreign Exchange Markets Markets •

The FOREX market provides the physical and institutional structure through which –

•

The money of one country is exchanged for that of another country

–

The rate of exchange between currencies is determined

–

Foreign exchange transactions are physically physically completed

exchange transaction is an agreement between a A foreign exchange buyer and a seller that t hat a fixed amount of one currency will be delivered for some other currency at a specified rate

Titles you can't find anywhere else

Try Scribd FREE for 30 days to access over 125 million titles without ads or interruptions! Start Free Trial Cancel Anytime.







Foreign Exchange Markets Markets •

There are six main characteristics of the FOREX markets which will be discussed –

The geographic extent The three main functions

–

The market’s participants

–

–

–

Its daily transaction volume Types of transactions including spot, forward and









Functions of the FOREX Market •

The FOREX market is the mechanism by which participants –

Transfer purchasing power between countries •

–

Obtain or provides credit for international trade trade transactions •

–

This is necessary as international trade and capital transactions normally involve parties living in countries with different different national currencies Inventories Inventories in transit must be financed

Minimize exposure to exchange rate risk









The Spot Market for Foreign Exchange •

Spot Mark Market –

•

A market for for the immediate purchase and delivery of currencies.

Spot Exchange Rates –

Market prices of foreign exchanges in the spot market that are the rates pertaining to the trading of foreign-currency-denominated foreign-currency-denominated deposits among









Central Bank

Order placed Order Proceed

order placed Open Bid

Order Proceed

Double auction Industry

Commercial bank

Commercial bank

Order placed inside spread shown

Order placed inside spread shown

Exchange Broker

Industry









 Inter-bank foreign exchange is the largest

financial market with a turnover of almost one trillion dollars.

 The foreign exchange market is an informal

arrangement of the larger commercial banks and a number of foreign exchange brokers. They are linked together by telephone, telex, and a satellite communications network called Computer based communications system based in Brussels,











Bank that purchased foreign currency have to pay the bank that sold the foreign currency. The payment generally takes place via a ; an institution at which banks keep funds that can be moved from one bank’s account to another’s to settle interbank transactions. When foreign exchange is trading against dollar, the clearing house is called : , located in New York. CHIPS is a computerized mechanism mechanism through which banks hold US $ to pay each other when buying or selling foreign exchange. System is owned by large New York









Quote Conventions •

It is important to remember that in countries other than in the United States, all exchange exchange rates with the dollar are usually given as direct rates.









The Spot Market - Conventions •

Denote the spot rate as S

•

For most currencies, use 4 decimal places in calculations With exceptions: i.e. S(¥/$)=109.0750, but S($/¥)=0.009168









Quotation Conventions









Bid-Ask Quotes •

Bid price: the exchange rate at which the dealer is willing to buy a currency.











Bid-Ask Quotes









Direct Exchange Quotes



















































Chapter 1 Spot Exchange Market

Recommend Documents