foreign exchange. basics of forex marketplace where currencies are exchanged critical for...
TRANSCRIPT
Basics of Forex
Marketplace where currencies are exchanged
Critical for conducting foreign business
Largest financial market
No centralized exchange
Market never closes
Governance
Not regulated by one governing body
Prices are market determined
No standardized pricing
Solely based on supply and demand
Spot Market
Also called cash market or physical market
Settled in cash “on the spot”
Underlying asset delivered immediately
Futures Market
Participants buy and sell contracts for a specific delivery date in the future
Set contract size and maturity
Standardization
Traded on exchanges
Direct vs. Indirect
Direct - Currency quote in which domestic currency is the base currency
Indirect - Currency quote in which he domestic currency is the quoted currency
Most traded against dollar
Cross Currency
Factors That Influence Currency Exchange
Differentials in Inflation
Differentials in Interest Rates
Current Accounts Deficits
Public Debt
Political Stability and Economic Performance
Supply and Demand!
Differential in Interest Rates
Interest rates affect inflation and exchange rates
High vs. Low Interest Rates
High IR (Mitigating effect)
Interest rates and inflation
Current Accounts Deficits
What is current account?
Current account deficit
Requires greater foreign currency
Excess demand for foreign currency
Public Debt
Large-Scale deficit financing
Spurs growth in domestic economy
Unattractive to investors due to inflationary risk (TIPS)
Monetary stimulus …
Political Stability and Economic Performance
Foreign investment
Strong economic performance
Political stability
Gold Standard
One of the most important events in history of Forex
Guaranteed the conversion of currency
Needed to maintain reserves
Problems
Bretton Woods
Before the end of WWII
Three main points A method of fixing exchange rates The Dollar replaces gold becomes reserve currency Creation of IMF, GATT, and International Bank for
Reconstruction and Development
Market Participants
Governments and Central Banks
Banks and other Financial Institutions
Hedgers
Speculators
Major Theories
Purchasing Power Parity
Interest Rate Parity
International Fisher Effect
Balance of Payments Theory
Purchasing Power Parity
Price levels between two countries should be equivalent to each other after exchange rate adjustment
Interest Rate Parity
Two assets in two different countries should have similar interest rates, as long as the risk is the same
International Fisher Effect
The exchange rate between two countries should change by an amount similar to the difference between their nominal interest rates