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ch16 - FIN 3303 Chapter 16 Foreign Exchange Markets What is...

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FIN 3303 Chapter 16 Foreign Exchange Markets What is the foreign exchange market and who are the major participants? It is the market where currencies are traded. The major participants are governments, who through central banks, buy and sell currencies. Multinational corporations are also major players along with large financial institutions. Brokers and dealers facilitate trading What is the difference between direct and indirect quotations? What is the relationship between the two? Direct: USD equivalent; how many USD I get for one unit of foreign currency Indirect: Currency per USD; have $1, how many units of foreign currency do I get? Bid versus ask prices Bid price: dealer purchase; individual sell Ask price: dealer sell; individual purchase Locational Arbitrage Possible when ask price is less than bid price at another bank. Triangular Arbitrage Capitalizing on discrepancies in cross-exchange rate. Possible when quoted cross-exchange rate differs from theoretical cross-exchange rate. Always buy overvalued currency.
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