BAR11S.14IE - Dr. Christine M. Shaw [BAR11S.14IE]...

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Dr. Christine M. Shaw [BAR11S.14IE] International Economics Outline for Week 9 I. Week 8 “highlights” II. The foreign exchange market A. There is a link between FX market and BOP 1. A nation’s demand for foreign exchange is derived from the debit items on its BOP → the demand for Euros arises from wishing to import champagne, brie and Hermes handbags 2. The supply of foreign exchange stems from items on the credit side of the BOP → the supply of yen arises from Japanese residents and businesses importing US goods and services and investing in the US B. To buy foreign goods and services, or invest in other countries, companies and individuals may need to first buy the currency of the country in which they are doing business 1. Generally, exporters prefer to be paid either in their country’s currency or in US $ - which is generally accepted worldwide 2. Thus, when Canadians buy oil from Saudi Arabia → they may pay in US $ - and not in Canadian $ or Saudi dinars – even though the US is not involved in the transaction 3. A currency that used like this is generally known as a “reserve currency” a. To be suitable as use as a reserve, a currency needs to be “convertible” and to belong to a large country with a reputation for low inflation b. Convertibility means that the holder has the right to change into any other currency c. A fully convertible currency – like the $ or the £ or the € - can be exchanged into any other currency by any other holder and for any other purpose d. More limited forms of convertibility are possible → for example, currencies may be convertible only by non-residents or only for current account – and not for capital account – purposes C. The foreign exchange market – or the FX market – is where the buying and selling of different currencies takes place 1. The market itself is actually a worldwide network of trades, connected by telephone lines and computer screens 2. There is no central headquarters 3. There are, however, 3 main centres of trading, which handle the majority of FX transactions → London, New York and Tokyo 1
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4. Frankfurt, Paris, Zurich, Hong Kong, Singapore and Sidney account for most of the remaining transactions 5. Trading goes on 24 hours a day 6. In 2001, an estimated $1210 billion was traded each day – roughly equivalent to every person in the world trading $195 daily D. Foreign exchange market participants 1. There are 4 types of participants – banks, brokers, customers and central
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BAR11S.14IE - Dr. Christine M. Shaw [BAR11S.14IE]...

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