1. The Foreign Exchange Market International Finance (MB 74)

2. The Foreign Exchange Market What is a foreign Exchange Market? A market where purchasing power in one currency can be converted into purchasing power into another currency. Rationale/Significance of the Foreign Exchange Market Characteristics 24 Hour Global OTC Market Principal Centers TokyoLondonNew York

3. The Foreign Exchange Market Contd… Volume: $1.3 trillion daily, up from $100 billion in the 1980s Main Participants Users Market Makers

4. Participants Users Multinationals Institutional Investors SpeculatorsTrading Companies Individuals Market Makers Commercial Banks Investment Banks Central Banks Exchanges —92% of the daily market activity driven by speculation

5. Major Trading Centers Percentage of Market London32% New York18% Tokyo 8% Singapore 7% Europe55% Asia26% North America19%

6. Currency Composition

7. Types of Instruments in the FX Market

8. Currency Prices BidOffer Yen per US $134.42134.60 TraderBuys US $ Sells US $ ClientSells US $Buys US $ £/$0.70200.7025 TraderBuys US $ Sells US $ ClientSells US $Buys US $

9. Currency Prices BidOffer U.S. Dollar/¥0.0075410.007547 TraderBuys ¥ Sells ¥ ClientSells ¥Buys ¥ U.S. Dollar/£1.42351.4245 TraderBuys £ Sells £ ClientSells £Buys £

10. How FX Traders Profit? Bid-Ask Spread Anticipation and speculation in exchange rate movement As a foreign exchange trader if you anticipate appreciation of Yen, what should you do As a foreign exchange trader if you anticipate depreciation of British pound, what should you do?

11. Foreign Exchange Markets Spot Market Forward Market Swap Market Eurocurrency Markets Eurodollar Market Eurobond Market

12. Spot Market The Standard Trade For delivery of currency bought and sold two business days from the trade date

13. Spot Market Quotations “Direct,” “American,” or “Normal Quotations ¥1 = $0.007547 THB1 = $0.02265 £1 = $1.4244 Price of domestic currency per unit of foreign currency “Indirect,” “European,” “Reciprocal”, or “Volume” Quoatations $1 = ¥132.50 $1= THB44.15 $1 = £0.7020 Effectively quotes the volume of foreign currency purchased by fixed quantity of domestic currency

14. Cross Rate of Exchange An Exchange Rate between two currencies that is derived from the exchange rates of those currencies with a third currency. Value of Currency A Value of Currency A per unit of Currency B Per unit of Currency C = -------------------------------------------------------- Value of Currency C per unit of Currency B

15. The Forward Market Forward Trade For delivery of both currencies more than two business days from trade date Forward Contracts and Hedging/Speculation Forward Rate Quotations Forward Premium/Discount

16. Swap Market Meaning of Swap Trade Simultaneous buying and selling of a currency with different maturities (usually from spot to a forward date)

17. Eurocurrency Markets Meaning of Eurocurrency market Eurodollar Market Reasons for growth of Eurodollar Market Eurobond Market Reasons for growth of Eurobond Market

18. Arbitrage in Currency Markets Locational Arbitrage Triangular Arbitrage