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International Business
Environments & Operations
14e
Daniels ● Radebaugh ● Sullivan
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Chapter 9
Global Foreign Exchange Markets
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Learning Objectives To learn the fundamentals of foreign exchange To identify the major characteristics of the
foreign-exchange market and how governments control the flow of currencies across national borders
To describe how the foreign-exchange market works
To examine the different institutions that deal in foreign exchange
To understand why companies deal in foreign exchange
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IntroductionLearning Objective 1: To learn the fundamentals of foreign exchange
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What Is Foreign Exchange?
Foreign exchange money denominated in the currency of another
nation or group of nations Foreign exchange market
where foreign exchange transactions take place
Exchange rate the price of a currency
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Players On The Foreign Exchange Market
Learning Objective 2: To identify the major characteristics of the foreign-exchange market and how governments control the flow of currencies across national borders
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Players On The Foreign Exchange Market
The Bank for International Settlements (BIS) divides the market into Reporting dealers Financial institutions Nonfinancial institutions
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Players On The Foreign Exchange Market
Foreign Exchange Markets: Turnover by Counterparty
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How To Trade Foreign Exchange
Learning Objective 3: To describe how the foreign-exchange market works
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How To Trade Foreign Exchange
Dealers can trade foreign exchange Using electronic methods (41.3%) Directly with customers (24.3%) Through the interbank market (18.5%) Through voice brokers (15.9%)
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Some Aspects Of The Foreign Exchange Market
The foreign exchange market has two segments OTC commercial and investment banks Securities exchanges
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Global OTC Foreign Exchange
Instruments Global OTC foreign exchange instruments
include Spot transactions Outright forward transactions FX swap Currency swaps Options Futures contracts
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Global OTC Foreign Exchange
InstrumentsForeign Exchange Markets: Turnover by Instrument
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Size, Composition, and Location of the Foreign
Exchange Market Market size is $4 trillion daily
the U.S. dollar is the most important currency on the foreign-exchange market
London is the main foreign exchange market in the world
The most commonly traded currency pairs are EUR/USD and USD/JPY
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Size, Composition, and Location of the Foreign
Exchange MarketForeign Exchange Markets: Average Daily Volume 1998-2010
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Size, Composition, and Location of the Foreign
Exchange MarketGlobal Foreign Exchange: Currency Distribution
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Size, Composition, and Location of the Foreign
Exchange MarketForeign Exchange Markets: Geographic Distribution
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Major Foreign Exchange Markets
Foreign exchange dealers quote rates Bid (buy) rate
the rate at which traders buy foreign exchange
Offer (sell) rate the rate at which traders sell foreign
exchange Spread
the difference between bid and offer rates
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Major Foreign Exchange Markets
American terms (direct quote) the number of dollars per unit of foreign
currency European terms (indirect quote)
the number of units of foreign currency per dollar
Base currency Terms currency
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The Forward Market Forward discounts
when the forward rate is less than the spot rate Forward premiums
when the forward rate is greater than the spot rate Option
the right, but not the obligation, to trade a foreign currency at a specific exchange rate
Futures specifies an exchange rate in advance of the
actual exchange of currency not as flexible as a forward contract
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The Foreign Exchange Trading ProcessThe Foreign Exchange Trading Process
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Banks And Exchanges The top banks in the inter-bank market in
foreign exchange can trade in specific market locations engage in major currencies and cross-trades deal in specific currencies handle derivatives
forwards, options, futures, swaps conduct key market research
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Banks And ExchangesForeign Exchange Trades: Top Commercial Banks, 2011
Ranked by Overall Market Share
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Top Exchanges For Trading Foreign Exchange
Three of the best-known exchanges are the Chicago Mercantile Exchange (CME)
Group the NASDAQ OMX the NYSE Liffe
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How Companies Use Foreign Exchange
Learning Objective 5: To understand why companies deal in foreign exchange
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How Companies Use Foreign Exchange
Import and export cash flow options Commercial bills of exchange
sight draft time draft
Letters of credit confirmed letter of credit
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How Companies Use Foreign Exchange
Other financial flows for business Speculation
buying or selling of a foreign currency that has an element of risk and a chance of great profits
Arbitrage the buying and selling of foreign currencies
at a profit due to price discrepancies interest arbitrage
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Where Are Foreign Exchange Markets Headed? More efficient markets
create more opportunities for foreign exchange trading
lower costs Financial crisis in Europe
future of the euro Rise of the Chinese yaun and Brazilian real Technology developments
more electronic trades
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