ECON5319-Lecture07-2011

ECON5319-Lecture07-2011 - International Finance ECON 5319...

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International Finance ECON 5319 The Foreign Exchange Market William J. Crowder Ph.D.
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The Foreign Exchange Market Origins of the Market • International trade - No single currency is particularly efficient as a medium of exchange. • International investment - Foreign assets are an alternative store of value. They may also serve to offset certain financial risks. Some of their features may not be available domestically too. • Speculation - The aim is purely to earn higher returns.
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Growth in the Global Foreign Exchange and Over-the-Counter Derivatives Markets
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Currency Distribution of Global Traditional Foreign Exchange Market Activity 200% 18.6% Other Currencies 1.6% NZD ($) New Zealand dollar 10 2.2% SEK (kr) Swedish krona 9 2.4% HKD ($) Hong Kong dollar 8 5.3% CAD ($) Canadian dollar 7 6.4% CHF (Fr) Swiss franc 6 7.6% AUD ($) Australian dollar 5 12.9% GBP (£) Pound sterling 4 19.0% JPY (¥) Japanese yen 3 39.1% EUR (€) Euro 2 84.9% USD ($) United States dollar 1 % daily share (April 2010) Currency Rank
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Currency Distribution of Global Traditional Foreign Exchange Market Activity
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$4 Trillion Every Day
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Global Foreign Exchange Market Turnover
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Geographical Distribution of Global Traditional Foreign Exchange Market Activity
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Foreign Exchange Market Products and Activities •A spot contract is a binding commitment for an exchange of funds, with normal settlement and delivery of bank balances following in two business days (one day in the case of North American currencies). forward contract , or outright forward , is an agreement made today for an obligatory exchange of funds at some specified time in the future (typically 1,2,3,6,12 months).
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Foreign Exchange Market Products and Activities • Forward contracts typically involve a bank and a corporate counterparty and are used by corporations to manage their exposures to foreign exchange risk. •A foreign exchange swap is the simultaneous sale of a currency for spot delivery and purchase of that currency for forward delivery. • Foreign exchange swaps can be used by dealers to manage the maturity structure of their currency positions.
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Foreign Exchange Market Products and Activities Speculation entails more than the assumption of a risky position. It implies financial transactions undertaken when an individual’s expectations differ from the market’s expectation.
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This note was uploaded on 07/16/2011 for the course ECON 5319 taught by Professor Crowder during the Spring '11 term at UT Arlington.

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ECON5319-Lecture07-2011 - International Finance ECON 5319...

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