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THE FOREIGN EXCHANGE

MARKET

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 The Role of Foreign Exchange Markets in
the Global Marketplace
¦ Exchange Rate
The value of one currency relative to another currency as
the number of units of one currency required to purchase
one unit of the other currency.
¦ Foreign-Currency-Denominated Financial Instrument
A financial asset, such as a bond, a stock, or a bank
deposit, whose value is denominated in the currency of
another nation.

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 èhat is the Foreign Exchange Market
¦ It is the oldest and largest financial market in the
worldͶmore than $1 trillion.
Has no central trading floor where buyers and sellers
meet.
Is open twenty-four hours a day, except for short gaps on
weekends.
Global banks account for about two-thirds of the market
volume, while foreign exchange brokers and dealers
account for approximately 20 percent.

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How Foreign Exchange Market èorks:
¦ commodity being traded is foreign exchange
and the price is the foreign exchange rate.
¦ The market is quite extensive and is highly
accessible to individuals and companies
¦ numerous financial institutions through which
foreign exchange transactions are effected

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How a Foreign Exchange Transaction is
Conducted

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 ARTICI ANTS IN THE FOREIGN EXCHANGE
MARKET
¦  articipants at 2 Levels
1. èholesale Level (95%)
- major banks
2. Retail Level
- business customers

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 ARTICI ANTS IN THE FOREIGN EXCHANGE
MARKET
¦ Two Types of Currency Markets
1. Spot Market:
- immediate transaction
- recorded by 2nd business day 2.
Forward Market:
- transactions take place at a
specified future date

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  ARTICI ANTS BY MARKET
¦ Spot Market
1. Commercial Bank
2. Brokers
3. Customers of commercial and Central Bank

¦ Forward Market
1. Arbitrageurs
2. Traders
3. Hedgers
4. Speculators

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  ARTICI ANTS BY MARKET
¦ Spot Market
A market for the immediate purchase and delivery
of currencies(Commercial bank, brokers,
customers of commercial and central
banks).
¦ Spot Exchange Rates
Market prices of foreign exchanges in the spot
market that are the rates pertaining to the trading
of foreign-currency-denominated deposits among
major banks in amounts of $1 million and more

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  ARTICI ANTS BY MARKET
¦ Forward Contract
A guarantee of a rate of exchange at a future date that can
eliminate foreign exchange risk, or cover an exposure.
¦ Forward Exchange Market
A market for contracts that ensures the future delivery of
and payment for a foreign currency at a specified exchange
rate.
¦ Forward Exchange Rates
The prices of contracts traded in the forward exchange
market.

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 MARKET SIZE
SIZE OF THE MARKET:
A. Largest in the world
1999: US$1.5 trillion daily
or
US$375 trillion a year
In 1999 the US GD  was US$9.1 trillion

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 MARKET SIZE
B.Market Centers (1998):
#1: London = $637 billion
daily
#2: New York= $351 billion
daily
#3: Tokyo = $149 billion
daily

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 MECHANICS OF S OT TRANSACTIONS
S OT TRANSACTIONS: An Example

Step 1. Currency transaction:

verbal agreement, U.S. importer specifies:

a. Account to debit (his acct)
b. Account to credit (exporter)

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 MECHANICS OF S OT TRANSACTIONS
Step 2. Bank sends importer
contract note including:
- amount of foreign
currency
- agreed exchange rate
- confirmation of Step 1.

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 MECHANICS OF S OT TRANSACTIONS
Step 3. Settlement
Correspondent bank in Hong
Kong transfers HK$ from
nostro account to exporter͛s.
Value Date.
U.S. bank debits importer͛s
account.

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 THE FORèARD MARKET
I. INTRODUCTION
A. Definition of a Forward Contract:
an agreement between a bank and a customer to
deliver a specified amount of currency against
another currency at a specified future date and at a
fixed exchange rate.

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 THE FORèARD MARKET
2.  urpose of a Forward:
Hedging
the act of reducing exchange
rate risk.

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 THE FORèARD MARKET
B.Forward Rate Quotations
1. Two Methods:
a. Outright Rate: quoted to
commercial customers.
b. Swap Rate: quoted in the
interbank market as a
discount or premium.

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 FOREIGN EXCHANGE CONTRACTS

¦ The contract details what asset is to be bought or sold, and

how, when, where and in what quantity it is to be delivered
¦ Currency in which the contract will trade, minimum tick
value, and the last trading day and expiry or delivery
month.
¦ Standardized commodity futures contracts may also
contain provisions for adjusting the contracted price based
on deviations from the "standard" commodity

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 FOREIGN EXCHANGE CONTRACTS

¦ Futures contracts are not issued like other securities, but

are "created" whenever Open Interest increases
¦ Contracts are also "destroyed" in the opposite manner
whenever Open Interest decreases
¦ The contracts ultimately are not between the original
buyer and the original seller, but between the holders at
expiry and the exchange

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 FOREIGN EXCHANGE TRADING
¦ Over the Counter(OTC) nature of currency markets, there are
rather a number of interconnected marketplaces, where different
currencies instruments are traded
¦ The main trading center is London but New York, Tokyo, Hong Kong
and Singapore are all important centers as well.
¦ Fluctuations in exchange rates are usually caused by actual
monetary flows as well as by expectations of changes in monetary
flows caused by changes in GD  growth, inflation , interest rates ,
budget and trade deficits or surpluses, large cross-border M&A
deals and other macroeconomic conditions.

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 FOREIGN EXCHANGE TRADING
¦ Currencies are traded against one another. Each currency pair thus
constitutes an individual trading product and is traditionally noted
XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217
international three-letter code of the currencies involved
¦ According to the BIS study, the most heavily traded products were:
EURUSD: 27%
USDJ Y: 13%
GB USD (also called 
): 12%

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¦  The most common type of forward transaction is the
currency swap. In a swap, two parties exchange currencies for
a certain length of time and agree to reverse the transaction
at a later date. These are not standardized contracts and are
not traded through an exchange.
¦ aForeign currency futures are exchange traded
forward transactions with standard contract sizes and
maturity dates Ͷ for example, $1000 for next November at an
agreed rate.Futures are standardized and are usually traded
on an exchange created for this purpose

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¦  A foreign exchange option (commonly shortened
to just FX option) is a derivative where the owner has the
right but not the obligation to exchange money
denominated in one currency into another currency at a
pre-agreed exchange rate on a specified date.

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 CONCLUSION
¦ Foreign exchange takes place when buyers find foreign
markets cheaper to buy in and sellers find them more
profitable to dispose of their products than the domestic
market. Foreign exchange gives us to strengthen the
business as well as the economy of the country.
¦ Thus we can say that the foreign exchange market is thus a
very important aspect of the measurement of the financial
situation of a particular country in the global marketplace.

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