Download - PPT (Foreign Exchange Market-Part1).pdf
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International Finance
Foreign Exchange Market (Part 1)
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Forex Market: Rational for Existence
Purpose of existence of forex market:
Assist international trade and investment
Facilitates hedging and makes possiblespeculation in foreign currency
Most forex transactions channeled throughthe worldwide interbank market
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Foreign Exchange Trading
Trading done by phone, telex or online on 24-hour basis (except weekends)
Trading moves from Asia to Europe to North America
No unified or centrally cleared market formajority of FX trade and very little cross-border regulation
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Foreign Exchange Trading
Main trading center: London.
Other important centers:
NY, Tokyo, HK, Singapore
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Top Currencies Traded
Most actively traded currencies:
US$
Euro
Yen
Pound Sterling
Swiss Franc
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Top Forex Traders
Top 5 currency traders:
Deutch Bank
Union Bank of SwitzerlandBarclay’s Capital
Citi
Royal Bank of Scotland
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Philippine Forex
Philippine Foreign Exchange
BSP dollar reference dollar exchange rate forthe day represents the weighted average of alldone deals at PDS during the preceding day
KBs give two-way quotes with the normalinterbank bid-offer spread of 0.0005 pesos
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Forex Quotes
Spot price
30-day forward quote
90-day forward quote
180-day forward quote
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Types of Forex Quotes
American term : US$ per unit of foreign currency
European term : foreign currency unit per US $
Direct quote : domestic currency price of foreigncurrency
Indirect quote : foreign price of domestic currency
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Forex Conversions : Basic
E.g. SFr 1 = US$ 0.7967 is converted to
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Forex Conversions : Bid-Ask
Quotes always given in pairs as a dealer wouldnot know if a client is in the market to buy or sellcurrency
First rate quoted: buy/bid price
Second rate quoted: sell/ask/offer price
E.g. Pound Sterling quote :
£: US$ 1.7442 - 53
dealer’s buying rate dealer’s selling rate
client’s selling rate client’s buying rate
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Sample Dealer Quotes
Quotes by different banks vary and the choice ofclients would depend on the best quote by eachdealer
E.g.: A US portfolio manager wants to buy $10 million
worth of European (French) bonds. He seeks
quotes on the euro/dollar rate from different banks
Bank A Bank B Bank C0.80000-20 0.79985-05 0.79995-15
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Bid-Ask Quotes
When direct quotations are converted intoindirect quotations, the bid-ask quotes are
reversed
In US forex market In UK forex marketUS$ 1.7442-53 per UK£ UK£ 0.5730-33 per US$
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Transaction Costs
Transaction Costs:
Percent Spread =
Midpoint Price =
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Sample Exercise
Given the following quote:
$ 0.9056 – 0.9065 / €
Convert the quote to €/$ bid-ask quote
Compute for the $/ € spread and midpoint price. Compute for the €/$ spread and midpoint price
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Midpoint of a Spread
The midpoint of a spread moves in response to adealer’s position. A dealer with excess supply of
the foreign currency would move the midpoint ofhis direct quote downwards rather than adjust the
size of the spread
Assume the ff €/$ quotes of different banks:
Bank A Bank B Bank C
0.80000-20 0.79985-05 0.79995-15
0.80010 0.79995 0.80005
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Cross Exchange Rates
Cross Rates
Using midpoint quotes Assume FC1 = currency of foreign country 1 ( €)
FC2 = currency of foreign country 2 (SFr)DC = currency of domestic country (US$)
If € is selling for US$ 1.20/ € and the buying rate for SFr
is US$ 0.80/SFr,
what would the SFr/ € cross exchange rate be?
what would the €/SFr cross exchange rate be?
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Cross Exchange Rates
For the SFr/ € cross exchange rate
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Cross Exchange Rates
For the €/SFr cross exchange rate
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Cross Exchange Rates
Given the ff. quotes:
Japanese ¥ : ¥ 135.62/US$
South Korean Won : W 763.89/US$
Assume : FC1 = ¥
FC2 = W
DC = US$
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Cross Exchange Rates
For the ¥/W cross exchange rate
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Cross Exchange Rates
For the W/¥ cross exchange rate