Economic Incentives and the use of methods of payment-oWhy doesn’t consumer pay the true cost of check and credit card transactionsTaxes- explicit interest on deposits is taxable, while implicit interest is notCompetition among banksoWhy don’t retailers pass on cost of credit card purchase to consumerCredit card consumers are already rich, retailers will offer them alower price because on the whole cardholders are better customersFloat-oDelay is what makes credit card purchase attractive. You receive merchandise but don’t have to pay until end of billing periodoFloat- interest earned because of delays in the payment systemoPaying by check also has float benefitoDon’t involve float = EFTPOSoLoss of float is one reason debit cards have been slow to catch on in the US, checks and credit cards offer greater floatThe Use of cash-oImmediate payment in cash has no float yet it is preferred, why?It is the only method that involves no credit (promise). Methods that involve credit have fixed costsForeign ExchangeThe Problem of Different Clearing Systems-If two consumers with different currency are share same bank or clearing system transaction is easyDifficult if not same clearing system. The payer must find a way to trade his bank dollars for bank dollars at the recipient’s bank or bank dollars that are convertible through a common clearing systemForeign exchange- trade in bank dollars of banks in different clearing systemsA Foreign Exchange TransactionBanks get other currency by:oIf bank is big enough it maintains a deposit of its own in other countries bank for such purposedoIf it doesn’t it ban buy the other currency in the inter banking market inforeign exchange where deposits in different countries are traded“Domestic Exchange”distance and poor communication would cause difference in currencies domestically. In 19thcentury, it was just as difficult to pay across country as itwas to pay internationallyIntroduction of euroThe Foreign Exchange MarketInterbank market in foreign exchange is an international marketTrade in this market include forward transactions as well as spot transactionsGrowth of the Market
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Trading volume in foreign exchange is greater than that of international trade, most foreign exchange trades are related to finance As volume of foreign exchange grows, securities firms have increasingly become dealer in foreign exchange, offering this service to their customers themselves, rather that referring them to a commercial bank How the market WorksMarket OrganizationsoForeign exchange transaction is a trade. oMarket organized by brokersVehicle CurrenciesoMost trading involves one or a few “vehicle currencies”, you trade vehicle currency for other currencyoPrinciple vehicle currency is the US dollar Settlement and Its ProblemsoHerstatt risk- risk counterparty will fail in the middle of an exchange of currenciesoTo reduce delay and the exposure to risk, payments in interbank market are cleared through the books of the Tokyo branch where deposits are guaranteed to the consumero
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