1. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-1 Chapter 15 Foreign Exchange: the structure and operation of the FX market

2. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-2 Learning objectives Understand the nature of global FX markets Discuss participants in the FX markets Describe the functions and operations of FX markets Outline instruments traded in FX markets Explain conventions for quotation and calculation of exchange rates and forward exchange rates, and complicating factors Recognise important FX impacts of the European Monetary Union

3. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-3 Chapter organisation 15.1 Exchange rate regimes 15.2 FX Market participants 15.3 operation of the FX market 15.4 Spot and forward transactions 15.5 Spot market quotations 15.6 Forward market quotations 15.7 European monetary union and FX markets 15.8 Summary

4. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-4 15.1Exchange rate regimes Each country or monetary union responsible for determining own exchange rate regime Exchange rate is value of one currency relative to that of another currency Major currencies like USD, GBP, JPY, EUR and AUD adopt floating exchange rate (free float) regime –Where exchange rate determined by supply and demand factors in the FX markets (cont.)

5. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-5 15.1Exchange rate regimes (cont.) Other types of exchange rate regimes include: –Managed float  Exchange rate held within defined band relative to other currency –Crawling peg  Exchange rate allowed to appreciate in controlled steps over time –Linked exchange rate  Value of currency tied to value of another currency or basket of currencies

6. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-6 Chapter organisation 15.1 Exchange rate regimes 15.2 FX Market participants 15.3 Operation of the FX market 15.4 Spot and forward transactions 15.5 Spot market quotations 15.6 Forward market quotations 15.7 European monetary union and FX markets 15.8 Summary

7. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-7 15.2FX market participants FX markets –Comprise all financial transactions denominated in foreign currency, currently estimated to be over USD4.00 trillion per day –Facilitate exchange of value from one currency to another –Internationally adopted FX market conventions to improve market functionality (cont.)

8. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-8 15.2FX market participants (cont.) FX market participants can be classified as: –FX dealers and brokers –central banks –firms conducting international trade transactions –investors and borrowers in the international money markets and capital markets –foreign currency speculators –arbitrageurs

9. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-9 FX dealers and brokers FX dealers –Are financial institutions, typically commercial banks and investment banks, that quote two-way (i.e. buy and sell) prices and act as principals in the FX market –Usually licensed or authorised by the central banks of the countries in which they operate FX brokers –Transact almost exclusively with FX dealers; they obtain the best prices in global FX markets matching FX dealers’ buy and sell orders for a fee

10. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-10 Central banks Enter FX market to: –purchase foreign currency to pay for government imports or pay interest on, or redeem, government debt –change the composition of holdings of foreign currencies in managing official reserve assets –influence the exchange rate

11. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-11 Firms conducting international trade transactions Exporters receive foreign currency for the sale of their goods and services Exporters use the FX market to sell foreign currency and buy AUD Importers use the FX market to buy foreign currency (sell AUD) for purchasing imports Copyright  2009 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Institutions, Instruments and Markets 6e by Viney Slides prepared by Anthony Stanger

12. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-12 Investors and borrowers in the international money markets and capital markets Commercial bank foreign borrowings are usually converted into the home currency –Payments of interest and principal need to be made in the denominated currency of the loan Corporations and financial institutions investing overseas –Need to purchase FX in order to make investments –Dividends or interest payments received from overseas investments will be denominated in a foreign currency

13. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-13 Speculative transactions Businesses and financial institutions may attempt to anticipate future exchange rate movements to make a profit There is a risk involved that the exchange rate will move: –in the opposite direction to that anticipated –in the anticipated direction but by less than expected (cont.)

14. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-14 Speculative transactions (cont.) Example If, today: Spot rate: USD1= AUD0.9725 Exchange rate expected today + n days: USD1= AUD1.0225 Then, today: Buy USD1 at a cost of AUD0.9725 Then, at today + n days: Sell USD1 and obtain AUD1.0225

15. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-15 Arbitrage transactions Profit is made through FX transactions that involve no FX risk exposure Types of arbitrage –Geographic  Where two dealers in different locations quote different rates on the same currency –Triangular  Occurs when exchange rates between three or more currencies are out of perfect alignment (cont.)

16. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-16 Arbitrage transactions (cont.) Example: Triangular arbitrage USD1 = AUD1.3525 USD1 = SGD1.3525 AUD1 = SGD 0.9870 Arbitrage strategy Sell AUD1.3525 and receive USD1 Sell USD1 to receive SGD1.3525 Sell SGD1.3525 to receive AUD1.3703

17. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-17 Chapter organisation 15.1 Exchange rate regimes 15.2 FX Market participants 15.3 Operation of the FX market 15.4 Spot and forward transactions 15.5 Spot market quotations 15.6 Forward market quotations 15.7 European monetary union and FX markets 15.8 Summary

18. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-18 15.3Operation of the FX market The FX market: –is a global market, operating 24 hours a day according to business hours across the time zones –consists of a vast and highly sophisticated global network of telecommunications systems that provide the current buy and sell rates for various currencies in dealing rooms located around the globe –involves larger FX dealers like commercial, investment and merchant banks providing the FX function as part of their overall Treasury operations within which they establish an FX dealing room

19. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-19 Chapter organisation 15.1 Exchange rate regimes 15.2 FX Market participants 15.3 Operation of the FX market 15.4 Spot and forward transactions 15.5 Spot market quotations 15.6 Forward market quotations 15.7 European monetary union and FX markets 15.8 Summary

20. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-20 15.4Spot and forward transactions FX market instruments are typically: –Spot transactions  Have maturity date two business days after the FX contract is entered into Used, for example, if an Australian importer has an account in USD to pay within the next few days –Forward transactions  Have maturity date more than two days after FX contract is entered into Used, for example, if Australian importer has to pay a USD liability in two months, and covers or hedges against an appreciation of the USD (cont.)

21. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-21 15.4Spot and forward transactions (cont.) Dealers may also provide short-dated transactions if necessary –‘Tod’ value transactions—same-day settlement –‘Tom’ value transactions—settlement tomorrow

22. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-22 Chapter organisation 15.1 Exchange rate regimes 15.2 FX Market participants 15.3 Operation of the FX market 15.4 Spot and forward transactions 15.5 Spot market quotations 15.6 Forward market quotations 15.7 European monetary union and FX markets 15.8 Summary

23. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-23 15.5Spot market quotations Asking for a quotation –The price of a currency is expressed in terms of another currency –The first currency mentioned is the price being sought (also called base currency or the unit of quotation) –The second currency is the terms currency  Example: USD/AUD is the price of USD1 in terms of AUD (cont.)

24. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-24 15.5Spot market quotations (cont.) Two-way quotations –Example: Australian dollar/euro may be expressed as EUR/AUD1.3755–1.3765, usually abbreviated to EUR/AUD1.3755–65  The two numbers indicate the dealer’s buy (bid) and sell (offer) price  A dealer quoting both bid and offer prices is a price-maker  The dealer will buy EUR1 for AUD1.3755  The dealer will sell EUR1 for AUD1.3765  Dealer ‘buys low’ and ‘sells high’ (cont.)

25. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-25 15.5Spot market quotations (cont.) Two-way quotations (cont.)  The difference between the buy and sell price is the ‘spread’, represented in percentage terms in Equation 15.1 (cont.)

26. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-26 15.5Spot market quotations (cont.) Transposing spot quotations –Example: Given a quotation of EUR/AUD1.3755–1.3765, the AUD/EUR quotation can be determined by transposing the quotation, i.e. ‘reverse and invert’ Reverse the bid and offer prices: 1.3765–1.3755 Then take the inverse (divide both numbers into 1) 1.000 1.3765 1.3755 AUD/EUR0.7265–0.7270 (cont.)

27. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-27 15.5Spot market quotations (cont.) Calculating cross-rates –All currencies are quoted against the USD –There are two ways currencies can be quoted against the USD:  Direct quote—the USD is the base currency  Indirect quote—the USD is the terms currency and the other currency is the base currency –When FX transactions occur between two currencies, usually where neither currency is the USD, the cross-rate needs to be calculated  Method of cross-rate calculation depends on whether the quote is direct or indirect (cont.)

28. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-28 15.5Spot market quotations (cont.) Calculating cross-rates (cont.) –Example 3: Crossing two direct FX quotations: USD/EUR0.7250–55 USD/JPY81.40–50 To determine the EUR/JPY cross-rate: 81.40/0.7255 = 112.20 81.50/0.7250 = 112.41 EUR/JPY 112.20-41 (cont.)

29. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-29 15.5Spot market quotations (cont.) Calculating cross-rates (cont.) –Example 4: Crossing a direct and indirect FX quotation: GBP/USD1.6270-75 USD/NZD1.3292-97 To determine the GBP/NZD cross-rate: 1.6270 x 1.3292 = 2.1626 1.6275 x 1.3297 = 2.1641 GBP/NZD2.1626-41 (cont.)

30. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-30 15.5Spot market quotations (cont.) Calculating cross-rates (cont.) –Example 5: Crossing two indirect FX quotations: AUD/USD0.9262–69 GBP/USD1.6270–75 To determine the AUD/GBP cross-rate: 0.9262/1.6275 = 0.5691 0.9269/1.6270 = 0.5697 AUD/GBP0.5691–97

31. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-31 Chapter organisation 15.1 Exchange rate regimes 15.2 FX Market participants 15.3 Operation of the FX market 15.4 Spot and forward transactions 15.5 Spot market quotations 15.6 Forward market quotations 15.7 European monetary union and FX markets 15.8 Summary

32. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-32 15.6Forward market quotations Forward points and forward exchange rates –The forward exchange rate is the FX bid/offer rates applicable at a specified date beyond the spot value date –The forward exchange rate varies from the spot rate owing to interest rate parity  Interest rate parity is the principle that exchange rates will adjust to reflect interest rate differentials between countries (cont.)

33. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-33 15.6Forward market quotations (cont.) Forward points and forward exchange rates (cont.) –Forward exchange rates are quoted as forward points, either above or below the spot rate  Forward points represent the forward exchange rate variation to a spot rate base  If the forward points are rising, add them to the spot rate (i.e. base currency is at a forward premium; interest rate of the base currency is lower)  If the forward points are falling, subtract them from the spot rate (i.e. base currency is at a forward discount; interest rate of the base currency is higher) (cont.)

34. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-34 15.6Forward market quotations (cont.) Forward points and forward exchange rates (cont.) –Example: Given AUD/USD (spot) 0.9630–40 and six-month forward points: 0.0032–0.0027 Since the forward points are falling, subtract them from the spot rate to obtain the six-month forward rate of: 0.9598–0.9613 (cont.)

35. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-35 15.6Forward market quotations (cont.) Forward points and forward exchange rates (cont.) –Equation 15.2 is a generalised formula to calculate forward points: – (cont.)

36. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-36 15.6Forward market quotations (cont.) Forward points and forward exchange rates (cont.) –Example 6: A company approaches an FX dealer for a forward quote on the USD/CHF with a three-month (90-day) delivery. The spot rate is USD/CHF1.1560. The dealer needs to calculate the forward points. Assume the three- month eurodollar interest rate is 3.00% per annum and the three-month euroswiss franc interest rate is 4.00% per annum –The three-month forward rate is USD/CHF1.1589. The points are added to the spot rate as the interest rate of the base currency is lower (cont.)

37. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-37 15.6Forward market quotations (cont.) Forward points and forward exchange rates (cont.) –Modifications to Equation 15.2 and Example 6 required  Different borrowing and lending rates apply in the euromarkets where interest rates are generally taken  An FX dealer: will need to adjust the formula to account for the different interest rates may also charge a margin for costs and perhaps some points to reflect their relationship with the company and market competition (cont.)

38. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-38 15.6Forward market quotations (cont.) Forward points and forward exchange rates (cont.) –Forward exchange contract  Locks in an exchange rate today for delivery of foreign currency at a specified future date  FX dealers quote forward points on standard delivery dates, usually monthly out to 12 months, of a specified amount of one currency against another (cont.)

39. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-39 15.6Forward market quotations (cont.) Forward points and forward exchange rates (cont.) –Forward exchange contract (cont.)  As the dealer does not know what the spot rate will be on a future date, they will carry out the FX transaction today even though delivery will not occur until the future date; i.e.: Borrow funds in one market and purchase the foreign currency that will be needed at a future date Invest the purchased foreign currency in that market until delivery is due The difference between the cost of borrowed funds and the return received on the invested foreign currency will be adjusted against the spot rate today (cont.)

40. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-40 15.6Forward market quotations (cont.) Some ‘real world’ complications –The equations and examples illustrated are simplified and ignore complexities of the ‘real world’ financial markets such as:  Two-way FX quotations Care needed in selecting appropriate bid and offer rates in calculating forward points  Different interest rate year conventions Converting a 360-day basis to a 365-day basis or vice versa  Variations in interest-compounding periods Consider the effective rate of interest on borrowed funds and the value of deposits (cont.)

41. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-41 15.6Forward market quotations (cont.) Some ‘real world’ complications (cont.)  Borrowing and lending interest rates Generalised Equation 15.2 for calculating forward points can be extended to account for borrowing and lending interest rate margins with Equations 15.3 and 15.4 – Copyright  2009 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Institutions, Instruments and Markets 6e by Viney Slides prepared by Anthony Stanger (cont.)

42. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-42 15.6Forward market quotations (cont.) Some ‘real world’ complications (cont.)  Borrowing and lending interest rates (cont.) Example 7: A company approaches an FX dealer for a forward quote on the USD/CHF with a three-month (90-day) delivery. The spot rate is USD/CHF1.1555-60. The dealer needs to calculate the forward points. Assume the three-month eurodollar bid and offer interest rates are 3.00% and 3.30% p.a. and the three-month euroswiss franc interest rates are 3.70% and 4.00% per annum, respectively (cont.)

43. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-43 15.6Forward market quotations (cont.) Some ‘real world’ complications (cont.)  Borrowing and lending interest rates (cont.) Bid forward points (cont.)

44. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-44 15.6Forward market quotations (cont.) Some ‘real world’ complications (cont.)  Borrowing and lending interest rates (cont.) Offer forward points The forward points are rising so they will be added to the spot rate. Therefore, the three-month forward exchange rate will be USD/CHF1.1566-89

45. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-45 Chapter organisation 15.1 Exchange rate regimes 15.2 FX Market participants 15.3 Operation of the FX market 15.4 Spot and forward transactions 15.5 Spot market quotations 15.6 Forward market quotations 15.7 European monetary union and FX markets 15.8 Summary

46. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-46 15.7European monetary union and FX markets Currently, 17 members of the EU are participants in EMU As the EMU gains acceptance, the size and liquidity of EMU member equity and bond markets will increase The euro has become a hard currency like the USD, JPY and GBP, in that it is generally accepted in international trade transactions (cont.)

47. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-47 15.7European monetary union and FX markets (cont.) Although it seems less likely now, during 2011 there was much speculation about the collapse of the euro. As sovereign debt crises gripped the EU, many commentators predicted that countries would revert to their traditional currencies. –For example, the Franc in France and the Deutschmark in Germany. It will remain to be seen whether the crises will become so severe as to force this particular outcome.

48. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-48 Chapter organisation 15.1 Exchange rate regimes 15.2 FX Market participants 15.3 Operation of the FX market 15.4 Spot and forward transactions 15.5 Spot market quotations 15.6 Forward market quotations 15.7 European monetary union and FX markets 15.8 Summary

49. Copyright  2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Financial Institutions, Instruments and Markets 7e by Viney and Phillips Slides prepared by Peter Phillips 15-49 15.8Summary FX market participants include companies, dealers, central banks, investors, speculators and arbitrageurs FX market instruments are usually either spot or forward transactions –Involve the quotation of the dealer’s buy-sell prices –Cross-rates calculations are necessary between two non- USD currencies –Forward exchange rates are quoted as forward points either above or below the spot rate –The euro has grown in acceptance to become a hard currency accepted in international trade transactions