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 A.The Currency Market: Where money denominated in one currency is bought and sold with money denominated in another currency.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

4.Percent Spread Formula (PS):

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

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

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

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

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

Example of a spot transaction Monday, 21 Sept 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

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 ……………….)

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

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

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

( Bank A dealer finds bank Bs price acceptable and wishes to buy EUR35million. ) Mine means I buy the specified quantity at your specified price………………………….

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.

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

Foreign Exchange Deals with the means and methods by which rights to income and wealth in one countrys currency are converted into similar rights in terms of another countrys currency Exchanges in the form of one currency to another or

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

Bills of exchange, trade bills, Bankers bill or Any promissory notes