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Foreign Exchange.ppt - Marriott School

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					      Foreign Exchange Quiz
What is foreign exchange?
    (Trading nations’ moneys.)
What is the exchange rate?
    (The price of one nation’s money in
 terms of another nation’s money.)
     Foreign Exchange Quiz
What is the spot exchange rate?
   (The price for “immediate” exchange)
What is the forward exchange rate?
   (The price that will take place
 sometime in the future.)
Currency Trading, Wall Street Journal                                                  •   U.S. $ EQUIV. CURRENCY PER U.S. $
 •   Wednesday, November 7, 2001                                                       •   Country       Wed              Tue                       Wed                   ,Tun
                                                                                           Kuwait (Dinar)                 3.2744                    3.2723                .3054
 •   EXCHANGE RATES                                                                                      .3056
 •   The New York foreign exchange mid-range rates below apply to trading                  Lebanon (Pound)                0006606                   .0006607              1513.75
     among banks in amounts of $1 million and more, as quoted at 4 p.m. Eastern                          f5i~.50
     time by Reuters and other sources. Retail transactions provide fewer units of     •   Malaysia (Ringgit)-b           2632                      .2632                 3,8000
     foreign currency per dollar. Rates for the 12 Euro currency countries are                           3.~9e0
     derived from the latest dollar-euro rate using the ex-change ratios set 1/1/99.       Malta (Lira) 2,2386            2,2326                    .4467                 , .¢479
 •   U.S. S EQUIV. CURRENCY PER U,S, $                                                     Mexico (Peso) ................
 •   Country       Wed                     Tue                   Wed                   •   Floating rate 1085             ,1086                     9.2155                9.2105
                   Tea                                                                     Netherlands (Guilder)          4075                      .4059                 2.4537
     Argentina (Peso)                      i.0005                1.0017                                  2.4635
                   .9995                   .9983                                           New Zealand (Dollar)           4196                      .4205                 2.3832
     Aestmlia (Dollar)                     5153                  .5136                                   2.3781
                   1.9408                  1.9472                                          Norway (Krone)                 1133                      ,1126                 8.8270
     China (Renminhi)                      1208                  .1208                                   8.8785
                   8.2766                  8,2767                                          Pakistan (Rupee)               01642                     .01635                60.900
 •   Colombia (Peso)                       '.0004334             .0004331                                61J~0
                   2307.50                 2309.00                                         Peru (new Sol)                 2901                      2901                  3.4468
     Czech. Rep. (Koruna) ....                                                                           "3.4475
     Commercial rate                       02687                 .02575                    Philippines (Peso)             01928                     .01925                51.875
                   37.223                  37.384                                                        51.960
     Denmark (Krone)                       1205                  .1203                     Poland (Zlety)-d               2453                      2444                  4,0760
                   8,2973                  8.3156                                                        4.0910
 •                 Ecuador (US Dollar)-e... 1.0000               1.0000                    Podugal (Escudo)               004480                    .004462               223.23
                   1.0000                  1.0000                                                        224.11
                                                                                           Russia (Ruble)-a               03362                     .03364                29.747
 •   Finland (Markka)                      1511                  .1505                                   29.7~7
                   6.6203                  6.6466                                                        :1=8461
     France (Franc)                        1369                  .1364                     1-month forward                6114                      .6075                 1.6356
                   7.3038                  7.3328                                                        1.64§1
     1-month forward                       1367                  .1362                     3-months forward               6115                      .6076                 1.6354
                   73127                   7.3425                                                        : .6459
     3-months for~*ard                     1364                  .1359                     6-months forward               6117                      .6078                 1.6348
                   7.3296                  7.3583                                                        1,64~
     6-months forward                      1351                  .1355                     Taiwaa (Dailar)                02899                     .02899                34.500
                   7.3493                  7.3777                                                        34.500
     Germany (Mark)                        4592                  .4574                     Thailand (Baht)                02239                     .02238                44.655
                   2.1777                  2.1864                                                        i114.6~5
     1-month forward                       4586                  ,4568                     Turkey (Lira)-f                00000064                  .00000065             1565000
                   2.1804                  2.1893                                                        1540090
     3-months forward                      4576                  .4558                     United Arab (Dirham)           2723                      .2723                 3.6730
                   2.1854                  2.1940                                                        3.6730
     6-months fcnvard                      4564                  .4546                     Uruguay (New Peso) .....
                   2.1913                  2.1997                                          Financial     07123            .07123                    14.040                t4.040
     Greece (Drachma)                      002536                .002625                   Venezuela (Bolivar)            001345                    .001345               743.50
                   379.37                  380.92                                                        743 50
     Hang Kong (Dollar)                    1282                  .1282                     SDR           1.2794           1.2760                    .7816                 :'.2837
                   7.7999                  7.7998                                          Eurn          8981             ,8946                     1.1135                11.1178
                   .8769                   .8804
     Israel (Shekel)                       2347                  .2348                 •
                   4.2610                  4.2690                                          Special Drawing Rights (SDR) are based on exchange rates for the U.S., German, British, French
     Italy (Lim) 0004638                   .0004620              2155.96                   , and Japanese c~rrerf-cies. Source= International Monetary Fund. a-Russian Central Bank rate.
                   2164.52                                                                 b-Government rate. d-Floating rate; trading band suspended on 4/1 1/OO. e-Adopted U,.9. dollar
     Japan (Yen) 008270                    .008246               120.92                    as of 9/1 i/OO. f-Floating rate, eft. Feb. 22. • , 1
                   121.27
     1-month forward                       008285                .008261
                   120.70                  121.05
     3-months forward                      008312                .008287
                   120.31                  120.68
Foreign Exchange, Banks and Demand

 • Where does most foreign exchange
   occur?
      (In banks located in London, New York
   and Tokyo.)
 • Who trades most of the money on
   international exchanges?
      (Banks again.)
Foreign Exchange, Banks and Demand

 • Whence comes the demand for foreign
  exchange?
    (From people, institutions and firms who
  want to make purchases abroad.)
Foreign Exchange, Banks and Demand

 • What do the following flows produce a
  demand for?
    U.S. exports of goods and services
    (demand for dollars)
    U.S. capital outflows
    (demand for foreign currencies)
    U.S. capital inflows
    (a supply of foreign currency and a
    demand for dollars.)
Foreign Exchange: The Rate
 • What determines the exchange
  rate then?
     (Supply and demand for foreign
  exchange.)
   Foreign Exchange: The Rate
• What kind of market type do we
 have here?
    (Competitive, because of the
 immediate market response to price.
 No product differentiation in foreign
 exchange markets.)
    Foreign Exchange: The Rate

• What is a floating exchange rate
 system?
    (One where markets, rather than
 bank interventions, determine prices of
 foreign exchange.)
       Traders and Arbitrage

• How do foreign exchange traders
 function?
 (They are wheelers and dealers by phone
 and computer, watching for price
 differentials.)
What is arbitrage?
 (Making two markets, by buying and
 selling between them, a single market.)
                 Arbitrage
An arbitrager, usually a large bank, may
 notice that in N.Y. 1 £ = $2.42 and in
 London, 1 £ = $2.40.
An agent will buy pounds in London (for
 $2.4 billion) and sell them in N.Y. (for
 $2.42 billion), earning a quick $20 million.
The increased demand in London pulls the
 price up, and the increased supply in New
 York pushes the price down, equalizing
 the pound/dollar price.
                     Arbitrage
Sell in this market (high)   Buy in this market (low)
                   S1
                       S2
                                                   S


                                                    D2

                       D                          D1
     Interbank Foreign Exchange
               Trading


About 90% of foreign
 exchange trading is in
 the Interbank part of
 the market.
       Interbank Foreign Exchange
                 Trading

Provides continuous
  information on the
  foreign exchange
  market—
• Talking with traders at other
    banks.
•   Observing prices (exchange
    rates) being quoted.
     Exchange Rate and Risk
• What is exchange rate risk exposure?
     (Earning a lot less than you expected, or
  paying a lot more than you expected when
  payment is made in the future at different
  exchange rates than originally prevailed.)
• What is hedging?
     (Reducing or eliminating a net asset or
  net liability position in foreign currency.)
     Exchange Rate and Risk
• What is speculation?
    Taking a net asset or “long” position
 (holding net assets in a foreign currency in
 excess of one’s anticipated transactions
 needs), or
 taking a net liability or “short” position in a
 currency (owing more in a currency than one
 owns or holds).
      Exchange Rate and Risk

If the forward rate of a currency, (the French
  franc) is lower than the spot rate (4;1, say,
  rather than 5:1), the market expects the
  value of the franc to rise against the dollar.
  There is a premium on forward (usually 90
  days) francs and a discount on 90-day
                     forward dollars.
    Foreign Exchange and Forward
              Contracts
• What is a forward
 foreign exchange
 contract?
     (An agreement to
 exchange one currency
 for another on some
 date in the future at a
 price set now [the
 forward exchange rate]).
    Foreign Exchange and Forward
              Contracts


• How can the bank afford
 to do that?
    (Question of balance
 and offsetting contracts.)
Exchange Contracts under Risk
 Currency Futures:
 -- Traded on organized exchanges
 -- The contract locks in the price.
 -- The buyer must put up a margin,
 which grows if rates keep changing
 adversely for the seller.
 -- Profits and Losses Accrue Daily
 (marking to market)
Exchange Contracts under Risk
    Currency Options:
 -- Buyer has right, seller has obligation to
   a future price set today, the “exercise”
   or “strike” price.
 -- The buyer pays a fee (“premium“) to
   exercise the option.
 -- Size of any loss is limited to premium
Exchange Contracts under Risk
     Currency Swap
   --A contract to exchange flows during a
 time period.
   -- Foreign currency earnings traded for
 domestic currency.
   --A set of spot and forward exchange
 rates in one contract.

				
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posted:7/25/2011
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