1.  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

2.  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 Dollar10.5915.3851.594116.3 Pound1.66519.122.607193.1 FFranc0.18230.109510.296521.11 DMark0.61490.36943.351172.14 Yen0.008470.0050930.04650.013791

3. 1. Direct quote: $.6149/DM 2. Indirect quote (reciprocal rate): DM1.6263/$ = 1/.6149 3. 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

4.  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

5.  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.

6. Bilateral arbitrage opportunity: Assume you can convert your $ into € 0.7431 with a broker in New York and then convert each € with a broker in Frankfurt for $1.346: New YorkFrankfurt $1.3457 / € € 0.7429/$ € 0.7431 /$$1.346/ € _____ $1  € 0.7431 * $1.346/ €  $1.0002

7. New York FrankfurtZurich € 0.7431 /$ CHF1.326/€ $1.016/CHF $1  € 0.7431 * CHF1.326/€  CHF.9854 * $1.016/CHF  $1.0011  Foreign exchange market efficiency –  Foreign exchange rates reflect all publicly available information