Finance 301 Study Sheet

Chapter 5 FX Market:

FUNCTIONS Transfer purchasing power between countries Obtain/provide credit for international trade transactions Minimize exposure to the risks of exchange rate changes

PARTICIPANTS Bank & nonbank FX dealers Individuals and firms Speculators and arbitragers Central banks and treasuries FX brokers

FX MARKET SUMMARY Global trading day - 24 hours - Dominated by London and New York Market size - Daily global net turnover in the FX market was USD 5.3 trillion in April 2013 ─ more than 12 times the global equity markets - London and New York make up roughly 60% of the FX market - Asian markets growing more rapidly than European markets Currency composition - US $ involved in 86% of currency trading - USD/EUR and USD/JPY make up 42% of trading - Big three ($, €, ¥) total roughly 92% of trading

FX TRANSACTIONS Spot (cash) market - Immediate transfer of a commodity or financial security Forward market - An agreement made today to purchase or sell a currency at a future date - Typical maturities 1, 2, 3, 6 and 12 months - All terms (the good, price, future date) are agreed today - Both buyer and seller remove price risk - Outright forward: requires delivery of the specific amount of currency - Nondeliverable forwards (NDFs): settled in cash Futures - A standardized forward contract that is traded on a commodity or security on an exchange Options - An option gives the buyer or seller the right, but not the obligation to buy or sell, a certain quantity of the underlying asset (currency) at a predetermined (strike or exercise) price on or before the expiration date Swap transactions

QUOTES A foreign exchange rate is the price of one currency expressed in terms of another currency CUR1/CUR2 CUR1 = base currency or one unit of the currency CUR2 = price currency or quote currency (??? units of the other currency) € 1.00 = $ 1.1008

EUROPEAN TERMS the amount of a foreign currency US $ 1.00 can buy US $ is priced in term of the...