308_c05_fxm_part01_f19 (2).pptx - Part 1 A Functions and...

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Part 1 Part 1
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A. Functions and Participants of the Foreign Exchange Market A. Functions and Participants of the Foreign Exchange Market
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FXM is Thin FXM is Thin Few market overlaps Few market overlaps Volume of transactions – Low Volume of transactions – Low High volatility High volatility Larger bid/ask spread Larger bid/ask spread There is a large numbers of market overlaps There is a large numbers of market overlaps Low exchange rate volatility Low exchange rate volatility FXM is Deep FXM is Deep Volume of transactions – high Volume of transactions – high Small bid/ask spread (transaction cost) Small bid/ask spread (transaction cost)
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FXM is the deepest FXM is the deepest
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Bid = the price the dealer pays to buy your currency Bid = the price the dealer pays to buy your currency Ask = the price the dealer charges to sell you his currency Ask = the price the dealer charges to sell you his currency The only way for the dealer to make a profit is to buy low and sell high, therefore the bid price will always be less than the ask price The only way for the dealer to make a profit is to buy low and sell high, therefore the bid price will always be less than the ask price Bid and Ask Bid and Ask
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Bid Bid USD 1.18/EUR USD 1.18/ EUR Ask Ask USD 1.19/EUR USD 1.19/ EUR These are the bid and ask prices for a EUR dealer These are the bid and ask prices for a EUR dealer Recall: the commodity is the bottom currency Recall: the commodity is the bottom currency The dealer buys a EUR from his customer by paying USD 1.18 The dealer buys a EUR from his customer by paying USD 1.18 The dealer sells a EUR to his customer by charging USD 1.19 The dealer sells a EUR to his customer by charging USD 1.19
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Bid/Ask Spread Bid/Ask Spread Bid Bid USD 1.18/EUR USD 1.18/EUR Ask Ask USD 1.19/EUR USD 1.19/EUR Whenever a dealer buys a EUR and sells the EUR later, he makes a profit of USD 0.01 Whenever a dealer buys a EUR and sells the EUR later, he makes a profit of USD 0.01 This profit is known as the bid/ask spread This profit is known as the bid/ask spread Bid/ask spread = Ask – Bid Bid/ask spread = Ask – Bid = 1.19 – 1.18 = USD 0.01/EUR = 1.19 – 1.18 = USD 0.01/EUR For his customers, the bid/ask spread represents the transaction cost For his customers, the bid/ask spread represents the transaction cost
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Dealers are marketmakers ; they stand ready to buy and sell at any time Dealers are marketmakers ; they stand ready to buy and sell at any time To sell, they must maintain an inventory To sell, they must maintain an inventory Since they have invested in an inventory, they have a vested interest in the currency. They want the currency to appreciate. Since they have invested in an inventory, they have a vested interest in the currency. They want the currency to appreciate.
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