Chapter15&16&17 - Chapter15 Foreign exchange the...

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Chapter15: Foreign exchange: the structure and operation of the FX market Part Opener p. 493 PART 5 THE FOREIGN EXCHANGE MARKET CHAPTER 15 Foreign exchange: the structure and operation of the FX market CHAPTER 16 Foreign exchange: factors that influence the exchange rate CHAPTER 17 Foreign exchange: risk identification and management p. 494 Our study of the financial system now moves to the exciting and dynamic world of the foreign exchange (FX) markets. The FX markets are truly global in that they trade the currencies of the majority of nation-states. The FX markets never close; somewhere in the world participants are trading currencies 24 hours a day. Exchange rates, that is, the price of one currency relative to another, change all the time. As new economic, political, financial and social information is released to the markets, FX dealers reassess the value of a currency. Foreign exchange rates also change in anticipation of new information coming to the market. Some may argue that perceptions, confidence and fear are the main drivers of prices in the FX markets. Nevertheless, the FX markets are volatile and participants rely on instant access to information. Organisations such as Reuters and Bloomberg specialise in providing information to the financial markets, including the FX markets. The purpose of Part 5 of this text is to provide a detailed analysis of the FX market and to consider the implications of movements in exchange rates for corporations, financial institutions and governments that conduct transactions that are denominated in a foreign currency. In Chapter 15 the structure and operation of the FX market is explained and the market participants that conduct FX transactions are identified. The types of transactions and the conventions adopted by FX market participants in quoting and dealing in FX are introduced
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and explained. Finally, the European Monetary Union (EMU) and the significance of its impact on the structure and operation of the international FX markets are discussed. Chapter 16 moves beyond the more mechanical aspects of the FX market and its operation, and provides a framework within which fluctuations in exchange rates may be analysed. Factors are identified that are commonly thought to have a major influence on the FX value of a currency. The chapter concludes with the view that, while some of the key determinants of the value of a currency can be identified, the influence of the variables may vary from one period to another, and sometimes from one country to another. Consequently, the forecasting of the value of a currency is quite difficult and often inaccurate. p. 495 As a result, corporations, financial institutions and governments that conduct transactions denominated in a foreign currency are exposed to FX risk. Chapter 17 introduces issues related to the identification, measurement and management of FX risk, in particular those aspects of risk associated with FX transactions. The use of forward exchange contracts as a strategy for managing FX risk exposures is considered.
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