To saisfy the excess demand excess supply the central

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(supply of) foreign currency on the private FOREX at the oicial ixed exchange rate. To saisfy the excess demand (excess supply) the central bank will typically automaically intervene on the FOREX and sell (buy) foreign reserves. Thus, by tracking sales or purchases of foreign reserves in the oicial reserve account we can determine if the country has a balance of payments deicit or surplus. Exporing a cow worth $100 increases current account by $100, but it also increases our holdings of foreign assets (the $100) by $100, which decreases the foreign account by $100, therefore they always balance. Only way the rest of the world can ship more money to us then we ship to them is if they already held that currency in their reserves Supply of AUD: I mports (M), income/transfer debits (Y-D), Capital and inancial ouflow (K ouflow) Demand for AUD: Exports (X), income/transfer credits (Y-C), capital and inancial inlow (K-inlow) Supply = Demand M + Y-D + K-O = X + Y-C + K-I M – X + Y-D – Y-C = K-I – K-O This is subject to a loaing exchange rate, which is determined by supply and demand Distributing prohibited | Downloaded by K C ([email protected]) lOMoARcPSD|2330446
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5. The FX Market (1) Deiniion The FX market is the market in which paricipants are able to buy, sell, exchange or speculate on currencies. It is an OTC market and is considered the biggest market in the world, due to its worldwide nature, the market is a 24/7 market (possibly 24/5), there will always be someone in the world willing to paricipate in the market and because it is OTC there does not need to be an open exchange. Trading volume largest in the world, at over $3tril USD a day. Most perfect market: homogenous, large buyers and sellers, free low of informaion and absence of barriers to entry (2) Market paricipants 1. Customers – investors, consumers, exports, imports 2. FIs – commercial banks – price seters – NBFIs – super, insurance, investment, IBs 3. Brokers -middlemen – organize deals for other paries Much more market informaion means beter deal Maintain anonymity for buyers 4. Central banks – govts bank – on behalf of gov Foreign exchange intervenion – inluence price, revaluaion of dollar, reduce volaility, makes prices less informaive More broadly, arbitragers, hedgers and speculators (3) Development of the FX market Forward mkt growing faster than spot market, FX market growing at about 10%, which is much faster than the global economic growth rate, if it coninued at that rate since Moosa’s stats in 2007 would have doubled, didn’t actually double, possibly due to the GFC and eurodebt crises. Largest FX market in the world is the UK (34%) market, followed by US (15%), while Australia is at about 5% in 7 th posiion Distribuion hasn’t changed much since then, with the top two’s growth falling but sill holding major importance USD is by far the largest currency exchanged – followed by euros, JPY, GPB, CHF and AUD USD/EUR, USD/JPY, USD/GPB, USD/CHF, USD/AUD top 5 currency pairs Distributing prohibited | Downloaded by K C ([email protected]) lOMoARcPSD|2330446
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6. The Eurocurrency Market (1) Context Involves transacions involving non-residents in which foreign currencies are setled, banks
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