1318955605_605__Week%252B6%252BSlides

1318955605_605__Week%252B6%252BSlides - Week 6:...

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Unformatted text preview: Week 6: International financial markets 12/05/11 1 330G financial markets Fundamentals of international financial market -- foreign exchange-- exchange rate 12/05/11 330G financial markets 2 Players on the foreign exchange market: Bank for International Settlements (BIS): based in Basel, Switzerland, a central banking institution owned and controlled by 55 central banks, divides the market into three major categories: reporting dealers, financial institutions, and non-financial institutions. 12/05/11 3 330G financial markets-- reporting dealers , known as money center banks, include 10 largest foreign exchange traders: Deutsche Bank, UBS, Barclays, RBS, Citi, JP Morgan, HSBC, Goldman Sachs, Credit Suisse, BoA.-- other financial institutions: commercial banks other than those money center banks; hedge funds, pension funds, money market funds, currency funds, mutual funds, specialized foreign exchange traders, and so on.-- non-financial institutions: governments and MNEs. 12/05/11 4 330G financial markets Electronic services:-- Reuters-- EBS-- Bloomberg Services: Link to the trading system, market data, news, quotes, statistics. 12/05/11 5 330G financial markets Foreign exchange markets, Over-the-counter market (OTC) : commercial banks, investment banks, other financial institutions Exchange traded market : security exchanges, e.g., the CME (Chicago Mercantile Exchange), NASDAQ OMX and NYSE Liffe (London International Financial Futures and Options Exchange) 12/05/11 6 330G financial markets The biggest markets: London New York Tokyo Singapore 12/05/11 7 330G financial markets Foreign exchange instruments: Spot transactions : spot rate; second date settlement Outright forward transactions : settle at a later date at a pre-agreed rate (catering to firm needs, e.g., time, amount) FX swap : swapped on one date and swapped back on a future date Currency swaps : deal with interest-bearing financial instruments (e.g. bond) Options : the right but not obligation to trade in the future Futures contract : buy or sell at a particular price and amount on a particular future date. (less flexible than forward transactions) 12/05/11 8 330G financial markets Derivatives, Outright forward transactions Foreign exchange swaps Currency swaps options Futures 12/05/11 9 330G financial markets Size of the market and major currencies around $ 5 trillion traded everyday US dollar accounts for 86.3% of all transactions (one side, buy or sell, 2007 data). Five reasons for its popularity: its an investment currency in many capital markets a reserve currency held by many central banks a transaction currency in many international commodity markets an invoice currency in many contracts an intervention currency to influence exchange rates 12/05/11 10 330G financial markets A typical spot market transaction:...
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1318955605_605__Week%252B6%252BSlides - Week 6:...

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