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Unformatted text preview: 536-1a_note, 11S FIN 536 SU Page 1 of 13Topic 1 Foreign Exchange Market (Chapter 6) I.Outline A.Structure of the Foreign-Exchange Market B.Foreign Exchange Rates and Quotations 1.Spot Quotations: a)Changing currency values b)Cross rate c)Bid-Ask Quotations 2.Forward Quotations: a)Outright rate b)Forward Point Quotation c)Percentage terms 3.Reading Newspaper Quotations II.Homework Assignment Chapter6End-of-Chapter Question3, 4, 5End-of-Chapter Problem (P)1, 2, 3, 7, 12, 15Exam Sample Problem (ES) 1-14 Supplementary Homework Problem (SH)1-6========================================================= Class Notes I.Structure of the FX Market A.Fixed vs. Floating exchange rate (pp. 56-61) B.Geographic Extent and Size: (Ex 6.1) 1.Geographic Extent: 24-hours trading. Not a physical trading place 2.Size: the largest financial market C.The Market: 1.The Interbank market & the Retail market D.FX market turnover 1.Geographic distribution (EX 6.3) 2.Currency Distribution (Ex 6.4) 536-1a_note, 11S FIN 536 SU Page 2 of 13E.Transaction Type (Ex. 6.2) 1.Spot Transaction 2.Outright Forward Transaction 3.Swap Transaction: Spot-Forward Swap, Forward-Forward Swap F.The participants: 1.Dealer a)maintain an inventory position b)Bid-Ask quotation 2.Foreign exchange brokers a)Match net supplier and demander banks b)Supply information c)Provide anonymity d)Compensated by a commission 3.Commercial Customers, Investors 4.Central Bank 0 0 0 536-1a_note, 11S FIN 536 SU Page 3 of 13G.Activities: 1.Speculation: a)Form expectation b)Speculate => Profit from exchange rate changes over a period of time 2.Arbitrage: a)Identify Arbitrage Opportunity b)Arbitrage => Profit from exchange rate differences at a given point in time 3.Hedging: a)Identify Exposure b)Hedge => Reduce risk 0 0 0 536-1a_note, 11S FIN 536 SU Page 4 of 13II.FX Quotations Spot Quotations A.FX quotations 1.For example, the exchange rate between US dollars and the Swiss franc can be stated as: a)SF1.2484 /$ 1.2484 SF/$ $1 = SF1.2484, or b)$0.8010 /SF 0.8010 $/SF SF1 = $0.8010 c)What is the BASE currency? TERMS currency?...
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This note was uploaded on 11/07/2011 for the course FIN 536 taught by Professor Staff during the Spring '11 term at S.F. State.

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536-1a_note[1] - 536-1a_note, 11S FIN 536 SU Page 1 of...

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