Foreign Exchange (FX) Market Outline 1. FX Market Participants 2. Spot Exchange Rates (Bid and Ask) 3. Market Rhythm 4. Cross Rates 5. Forward Market 6. Funding Swaps

FX Market Participants 1. Interbank Market (wholesale) about 200 major banks around the world 2. FX Brokers 3. Corporations and Individuals (retail) 4. Central Banks

Spot Exchange Rates 1. An exchange rate is valuing one currency (the object currency) in terms of another currency (the reference currency) means one euro (object) is valued at 1.35 dollars (reference currency) 3. ¥99.50 means one dollar (object) is valued at yen 4. Exchange rates are quoted two ways. The bid rate is where the market will buy the object currency. The offer rate is where the market will sell the object currency – 10 ¥99.50 – A pip is an exchange point. 10 pips represent the Bid Ask spread above

Market Rhythm 1. The larger and deeper market opens in Tokyo at 8 am. 2. Six hours later Europe opens and joins Asian trading activity 3. Four hours later Asia leaving the market 4. Two hours later New York opens and joins London trading activity 5. Four hours later London closes 6. New York closes four hours later at 4 pm.

Cross Rates 1. ¥/ = ¥/$ x $/ = x = ¥/£ = ¥/$ x $/£ = x = /£ = /$ x $/£ = 1/ x = Rmb/$ is 6.20, what is yen/rmb?

Forward Market(A) 1. The Spot market quotes exchange rates two business days ahead. If today is Thursday, then the spot exchange date is Monday, if it is not a holiday. 2. The Forward market begins three business days ahead and can go as far as ten years or more depending on the depth of the relevant money and bond markets. 3. The difference between the Spot Rate and the Forward Rate is in swap points. 4. If spot is and 6-month forward is , then 50 swap points separate the two rates.

Forward Market(B) 1. Since the value of the euro is less in the Forward Market than it is in the Spot Market, it is trading at a discount. 2. This means that euro interest rates are higher than dollar interest rates. 3. Also the dollar must be trading at a premium and that means dollar interest rates are lower than euro interest rates.

Funding Swaps 1. Many times commercial and central banks need to borrow foreign currencies. 2. Rather than borrowing directly from the money or bond market, they can swap their currency for the foreign currency they need. 3. Citibank, Seoul needed Korean won to lend to their corporate clients. Bank of Korea wanted US dollars for their reserves. 4. Thus, Citibank, Seoul swapped dollars for won.