 Network of financial institutions and brokers in which individuals, businesses, banks, and governments buy and sell the currencies of different countries  The liquidity of the market provides businesses with access to international markets for goods and services by providing foreign currency necessary for transactions worldwide

 The bid price is the price at which the market is willing to buy a particular currency  The ask price is the price at which the market is willing to sell a particular currency Convert From/ToDollarPoundFFrancDMarkYen Dollar Pound FFranc DMark Yen

1. Direct quote: $.6149/DM 2. Indirect quote (reciprocal rate): DM1.6263/$ = 1/ Bid rate = $.6149/DM (price bid by broker to purchase DM) Ask rate = $.6273/DM =1/1.594 (price asked by broker to sell DM) Spread = $.0124 = transaction cost

 Objectives ◦ Minimize cost of funds ◦ Improve liquidity ◦ Reduce risks ◦ Improve return on investment  Cash inflows and outflows Beginning cash balance Collections Disbursements Ending cash balance Investing surplus cash Covering cash shortage Ending cash required

 Compare direct rates to cross rates to identify attractive exchange opportunities: ◦ Direct rate to convert £ to DM = DM2.607/£ ◦ Cross rate DM/£ using $: Convert £ to $ ($1.665/£) and then convert $ to DM (DM1.594/$): ($1.665/£) * (DM1.594/$ )= DM2.654/£ ◦ This particular cross rate of £ to $ to DM is more attractive than converting £ directly to DM.

Bilateral arbitrage opportunity: Assume you can convert your $ into € with a broker in New York and then convert each € with a broker in Frankfurt for $1.346: New YorkFrankfurt $ / € € /$ € /$$1.346/ € _____ $1  € * $1.346/ €  $1.0002

New York FrankfurtZurich € /$ CHF1.326/€ $1.016/CHF $1  € * CHF1.326/€  CHF.9854 * $1.016/CHF  $  Foreign exchange market efficiency –  Foreign exchange rates reflect all publicly available information