Lecture_03_2007

Lecture_03_2007 - International Finance FINA 5331 Lecture...

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International Finance FINA 5331 Lecture 3: 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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Average Daily Turnover in billions of US dollars Notional Amounts for Derivatives 350 400 240 420 670 900 196 362 520 590 0 200 400 600 800 1000 1200 1400 1600 1800 2000 April 1989 April 1992 April 1995 April 1998 Spot Transactions OTC Derivative Instruments Traditional Foreign Exchange Instruments 590 820 1190 1490 Source: Bank for International Settlements Central Bank Survey 1998 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 Percentage Shares of Average Daily Turnover (Total = 200) April 1998 Source: Bank for International Settlements Central Bank Survey 1998 87 30 21 11 5 7 4 3 17 15 US dollar Deutsche mark Japanese yen Pound sterling French franc Swiss franc Canadian dollar Australian dollar other EMS currencies Other currencies
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Geographical Distribution of Global Traditional Foreign Exchange Market Activity Average Daily Turnover in billions of US dollars April 1998 Source: Bank for International Settlements Central Bank Survey 1998 United Kingdom 32% United States 18% Japan 8% Hong Kong 4% Switzerland 4% Others 18% France 4% Germany 5% Singapore 7%
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Geographical Distribution of Global Over-the-Counter Derivatives Market Activity United Kingdom 36% Japan 9% Germany 7% United States 19% Switzerland 3% Canada 2% Singapore 2% Others 12% France 10% Average Daily Turnover of Notional Amounts in billions of US dollars April 1998 Source: Bank for International Settlements Central Bank Survey 1998
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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). A 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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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
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This note was uploaded on 07/16/2011 for the course ECON 5327 taught by Professor Staff during the Spring '08 term at UT Arlington.

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Lecture_03_2007 - International Finance FINA 5331 Lecture...

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