Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 1 Chapter 2: The Foreign Exchange Market 熊家财 江西财经大学会计学院

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 2 Chapter 2: The Foreign Exchange Market 2.1The Organization of the Foreign Exchange Market 2.2Currency Quotes and Prices 2.3Inside the Interbank Market I: Bid-Ask Spreads and Bank Profits 2.4Inside the Interbank Market II: Communications and Fund Transfers 2.5Describing Changes in Exchange Rates

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall The Organization of the Foreign Exchange Market The Organization: Overview Size of the Market Types of Contracts Traded Foreign Exchange Brokers Computerized Trading Systems The Competitive Marketplace

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4 Exhibit 2.1 The Structure of the Foreign Exchange Market

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall The Organization of the Foreign Exchange Market Size of the Market Largest financial market in the world - dollar volume of trade NYSE: $ 75 billion Types of Contracts Traded Focus in this chapter is on a spot market contract that is settled in 48 hours 1973Late 1980s $10-$20 billion$5001 trillion1.9 trillion

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 6 Exhibit 2.2 Foreign Exchange Trading Activity Around the World

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall The Organization of the Foreign Exchange Market Foreign Exchange Dealers –Foreign exchange dealers –Market makers –Liquidity Easy to match buyers and sellers Low transaction costs

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall The Organization of the Foreign Exchange Market Computerized Trading Systems - Dealing 3000 (Reuters, 1992) - Electronic Brokering Service (EBS, 1993) The Competitive Marketplace

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 9 Exhibit 2.3 The Top 20 Dealers in the Foreign Exchange Market

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Currency Quotes and Prices Currency Quotes and Prices: Overview Exchange Rates Exchange Rate Quotes Vehicle Currencies and Currency Cross-Rates Triangular Arbitrage

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Currency Quotes and Prices Exchange Rates Exchange Rate Quotes Direct quotes Indirect Quotes European Quote American Quote Dollar price of a foreign currency

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 12 Exhibit 2.4 Currencies and Currency Symbols

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 13 Exhibit 2.5 Currency Quotes in the Wall Street Journal

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Currency Quotes and Prices Vehicle Currencies and Currency Cross-Rates Vehicle currency Cross-rates Example: Trading currency in the New York market where both currencies are not expressed in U.S. dollars

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15 Exhibit 2.6 Cross-rates Quotes in the Wall Street Journal

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Currency Quotes and Prices Triangular Arbitrage An arbitrage process involving three currencies - EUR / GBP - EUR / USD - USD / GBP

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 17 Exhibit 2.7 Triangular Arbitrage Diagram

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 18 Exhibit 2.8 Good and Bad Triangular Arbitrages

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Inside the Interbank Market I: Bid-Ask Spreads and Bank Profits The Interbank Market: Overview Introduction Bid-Ask Spreads The difference between the ask rate and the bid rate The Magnitude of Bid-Ask Spreads Bid-Ask Spreads All Day Around the Work

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Inside the Interbank Market I: Bid-Ask Spreads and Bank Profits Introduction Bid rate Ask Rate Bid-Ask Spread Bid-Ask Spreads Offer Price

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Inside the Interbank Market I: Bid-Ask Spreads and Bank Profits The Magnitude of Bid-Ask Spreads Pip Fourth decimal place in a dealer’s quote Bid-Ask Spreads The difference between the bid and the ask rates

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 22 Exhibit 2.9 The Reciprocal Nature of Bid and Ask Exchange Rates

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Inside the Interbank Market II: Communications and Fund Transfers Communication Systems Society of Worldwide Interbank Financial Telecommunications (SWIFT) Clearing House Interbank Payments System (CHIPS) Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) Fedwire Cross-Currency Settlement (Herstatt Risk)

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 24 Exhibit 2.10 Communication Systems in the Forex Market

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Inside the Interbank Market II: Communications and Fund Transfers Cross-Currency Settlement (or Herstatt) Risk The risk that a financial institution may not deliver the currency on one side of a completed transaction

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Describing Changes in Exchange Rates Introduction Appreciation Depreciation Devaluations Revaluations Rates of Appreciation and Depreciation

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 27 Exhibit 2.11 Netting Arrangements

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 28 Exhibit 2.11 Netting Arrangements