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2 Forex market - Foreign Exchange Market Learning...

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1 Foreign Exchange Market Learning objectives: Understand how foreign exchange market works understand hedging and speculation Lecture objectives Institutional aspects of the foreign exchange market Understanding risk in foreign exchange transactions
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2 Foreign Exchange Market Where you buy and sell one country’s currency against another Biggest “market” in the world Global market – where – who participates
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3 What is an exchange rate? Price of one unit of foreign currency - or amount of foreign currency you get for $1 Spot vs. Forward Forward premium vs. forward discount Appreciation/depreciation
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4
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5 “other” exchange rates Effective exchange rates Exchange rate that apply from one currency to other currency Real exchange rates Are rate that are adjusted by rates in other country Real effective exchange rate
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6 Relationship between spot & forward rates Set by * covered interest arbitrage* Setup: Spot rate - $1= 100 yen (y) US interest rate = 8% (per year) Japanese interest rate = 4% (per year) See any way to make money?
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7 CIA Today: Borrow 100 million y in Japan for 90 days for 4% x 3/12 = 1% Convert y to 1 million $, lend $ for 90 days at 8% x 3/12 = 2% In 90 days: You have: $1.02 million $ You owe 101 million y Have you made money?
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