BUS426_Final Exam Study Guide

BUS426_Final Exam Study Guide - Foreign Exchange Market...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Foreign Exchange Market – encompasses the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, trading in foreign currency options and the futures contracts, and currency swaps. The structure of the foreign exchange market is an outgrowth of one of the primary functions of a commercial banker: to assist clients in the conduct of international commerce. The spot and forward exchange markets are over-the-counter markets, that is, trading does not take place in a central marketplace where buyers and sellers congregate. Rather, the foreign exchange market is a worldwide linkage of bank currency traders, nonbank dealers, and FX brokers, who assist in trades, connected to one another via a network of telephones, computer terminals, and automated dealing systems. Spot Quotes – the immediate purchase or sale of foreign exchange. Typically, cash settlement is made two business days after the transaction for trades between the U.S. dollar and a non-North American currency. Spot rate currency quotations can be stated in direct or indirect terms. Direct Quotes – the price of one unit of foreign currency in U.S. dollars. Indirect Quotes – from the U.S. perspective, the price of one U.S dollar in the foreign currency. Bid and Ask – Interbank FX traders buy currency for inventory at the bid price and sell from inventory at the higher offer or ask price. Cross-Rates – exchange rate between a currency pair where neither currency is the U.S. dollar. It can be calculated from the U.S. dollar exchange rates for the two currencies, using either European or American term quotations. Triangular Arbitrage – if the direct quotes are not consistent with cross-exchange rates, a triangular arbitrage profit is possible. It is the process of trading out of the U.S. dollar into a second currency, then trading it for a third currency, which is in turn traded for U.S. dollars. The purpose is to earn an arbitrage profit via trading from the second to the third currency when the direct exchange rate between the two is not in alignment with the cross-exchange rate. Outright – an uncovered speculative position in a currency, even though it might be part of a currency hedge to the bank customer on the other side of the transaction. Swap Quotes – provide a means for the bank to mitigate the currency exposure in a forward trade. A forward swap transaction is the simultaneous sale (or purchase) of spot foreign exchange against a forward purchase (or sale) of approximately an equal amount of the foreign currency. Forward Markets – involves contracting today for the future purchase or sale of foreign exchange. The forward price may be the same as the spot price, but usually it is higher (at a premium) or lower (at a discount) than the spot price. Forward exchange rates are quoted on most major currencies for a variety of maturities.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/07/2012 for the course BUS 426 taught by Professor None during the Fall '08 term at N.C. State.

Page1 / 3

BUS426_Final Exam Study Guide - Foreign Exchange Market...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online