Lecture_18_Fall_07_____Katherine_Weber

Lecture_18_Fall_07_____Katherine_Weber - Presentation to...

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AEM/ECON 230 Introduction to Foreign Exchange November 15, 2007 Presentation to:
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Table of Contents Agenda I. Overview II. Products and Common Uses I. Spot II. Forwards and Swaps III. Options III. What Drives the Market? I. By the Book: Supply and Demand for Currencies II. Links to Other Asset Classes III. Implications of Market Risk Sentiment IV. Where Are We Now?
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Market Overview
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Market Overview ± FX markets trade globally from Monday morning in Wellington to Friday evening in New York. ± In 2007, average daily turnover was $3.2 trillion – an increase of 65% over 2004 at constant exchange rates, or 71% at current exchange rates ± Increased global focus on emerging markets is evident in turnover data – EM accounted for about 20% of all transactions this year ± The rapid growth in FX markets in the past three years has been attributed in part to increased participation from hedge funds, retail investors, and algorithmic trading programs ± London is the largest center in the FX markets, accounting for 42.5% of derivative sales; New York is second with 23.8% market share in OTC derivatives EUR JPY GBP CHF Other G10 EM 0 500 1000 1500 2000 2500 3000 3500 1992 1995 1998 2001 2004 2007 $, BIO Swap Outright Spot How Big is the FX Market? Daily Turnover by Currency Daily Turnover by Product 1
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Foreign Exchange Products
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± Often prices are quoted with just the last two decimals (EUR/USD is at “01” in the box above) ± If a currency is trading with 2 zeros at the end (e.g. 1.4600 in EUR/USD or 110.00 in USD/JPY) it is trading “at the figure ± Pronunciation of a given currency pair is a function of jargon – EUR/USD is read as “Euro-dollar” or often just “Euros”; NZD/USD is referred almost exclusively as “kiwi” ± EUR is the base currency. USD is the terms currency. All currency rates are quoted as terms per base . In the world of FX, the first currency listed is the base currency The Spot Market “EUR/USD is 1.4601” pip base terms ± A spot trade is an exchange of one currency for another (buy one, sell another) at the current market rate, for delivery in 2 days (some exceptions: USD/CAD and USD/TRY settle the next day) handle Quotation and Conventions 2
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± Quoting: Customarily foreign exchange rates are quoted in terms of the dollar – i.e. the number of units of the currency per one dollar i.e. USD/CHF trades at 1.1500 then one can exchange one USD for 1.15 CHF. The major exceptions are the EUR, GBP, NZD and AUD ± Cross Rates: If two currencies are quoted and one of them is not the dollar, the rate is called a cross rate. The most liquid crosses against EUR are: EUR/JPY, EUR/GBP, EUR/CHF, EUR/NOK, and EUR/SEK The Spot Market Conventions Currency Written convention Quote style Euro EUR/USD $ per euro British Pound (“Sterling,” “Cable”) GBP/USD $ per pound New Zealand Dollar (“Kiwi”) NZD/USD $ per Kiwi Australian Dollar (“Aussie”) AUD/USD $ per Aussie Japanese Yen USD/JPY Yen per $ Canadian Dollar (“CAD,” “C-dollar”)
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This note was uploaded on 03/04/2008 for the course ECON 2300 taught by Professor Lee during the Fall '07 term at Cornell.

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Lecture_18_Fall_07_____Katherine_Weber - Presentation to...

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