Professional Documents
Culture Documents
6-2
A foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of one currency will be delivered for some other currency at a specified date.
Copyright 2010 Pearson Prentice Hall. All rights reserved.
6-3
Geography
The foreign exchange market spans the globe, with prices moving and currencies trading somewhere every hour of every business day.
As the next exhibit will illustrate, the volume of currency transactions ebbs and flows across the globe as the major currency trading centers open and close throughout the day.
Copyright 2010 Pearson Prentice Hall. All rights reserved.
6-4
Exhibit 6.1 Measuring Foreign Exchange Market Activity: Average Electronic Conversions Per Hour
6-5
6-6
Market Participants
The foreign exchange market consists of two tiers:
the interbank or wholesale market (multiples of $1MM US or equivalent in transaction size), and the client or retail market (specific, smaller amounts).
Four broad categories of participants operate within these two tiers; bank and nonbank foreign exchange dealers, individuals and firms conducting commercial or investment transactions, speculators and arbitragers, and central banks and treasuries.
6-7
6-8
6-9
6-10
6-11
6-12
6-13
6-14
Market Size
In April 2004, a survey conducted by the Bank for International Settlements (BIS) estimated the daily global net turnover in traditional foreign exchange market activity to be $1.9 trillion. This most recent period showed dramatic growth in foreign exchange trading over that seen in April 2001.
6-15
Exhibit 6.2 Global Foreign Exchange Market Turnover, 1989-2007 (daily averages in April, billions of US$)
6-16
Exhibit 6.3 Top 10 Geographic Trading Centers in the Foreign Exchange Market, 19922007 (daily averages in April, billions of U.S. dollars)
6-17
Exhibit 6.4 Foreign Exchange Market Turnover by Currency Pair (Daily averages in April)
6-18
6-19
Most foreign currencies in the world are stated in terms of the number of units of foreign currency needed to buy one dollar.
Copyright 2010 Pearson Prentice Hall. All rights reserved.
6-20
Excluding two important exceptions, most interbank quotations around the world are stated in European terms.
Copyright 2010 Pearson Prentice Hall. All rights reserved.
6-21
6-22
6-23
6-24
Rather, it is the difference between the forward rate and the spot rate.
6-25
6-26
For quotations expressed in home currency terms (Direct quotations) the formula becomes:
f = Forward Spot x 360 Spot n
Copyright 2010 Pearson Prentice Hall. All rights reserved.
x 100
6-27
6-28
$1.2223/
6-29
6-30
Beginning Rate
x 100
Ending Rate
Copyright 2010 Pearson Prentice Hall. All rights reserved.
x 100
6-31
Mini-Case Questions: The Venezuelan Bolivar Black Market Why does a country like Venezuela impose capital controls? In the case of Venezuela, what is the difference between the gray market and the black market? Create a financial analysis of Santiagos choices and use it to recommend a solution to his problem.
6-32
Chapter 6
Exhibit 6.5 Spot and Forward Quotations for the Euro and Japanese Yen
6-34
Exhibit 6.6 Foreign Exchange Rate Quotations on the U.S. Dollar/British Pound in the Financial Press
6-35
6-36
6-37
Exhibit 1 Venezuelan Official and Gray Market Exchange Rates, Venezuelan Bolivar/U.S. Dollar (January 2002March 2004)
6-38