Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-1 International Business Environments & Operations 14e Daniels ● Radebaugh ● Sullivan

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-2 Chapter 9 Global Foreign Exchange Markets

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-3 Learning Objectives  To learn the fundamentals of foreign exchange  To identify the major characteristics of the foreign-exchange market and how governments control the flow of currencies across national borders  To describe how the foreign-exchange market works  To examine the different institutions that deal in foreign exchange  To understand why companies deal in foreign exchange

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-4 Introduction Learning Objective 1: To learn the fundamentals of foreign exchange

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-5 What Is Foreign Exchange?  Foreign exchange money denominated in the currency of another nation or group of nations  Foreign exchange market where foreign exchange transactions take place  Exchange rate the price of a currency

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-6 Players On The Foreign Exchange Market Learning Objective 2: To identify the major characteristics of the foreign-exchange market and how governments control the flow of currencies across national borders

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-7 Players On The Foreign Exchange Market  The Bank for International Settlements (BIS) divides the market into Reporting dealers Financial institutions Nonfinancial institutions

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-8 Players On The Foreign Exchange Market Foreign Exchange Markets: Turnover by Counterparty

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-9 How To Trade Foreign Exchange Learning Objective 3: To describe how the foreign-exchange market works

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-10 How To Trade Foreign Exchange  Dealers can trade foreign exchange Using electronic methods (41.3%) Directly with customers (24.3%) Through the interbank market (18.5%) Through voice brokers (15.9%)

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-11 Some Aspects Of The Foreign Exchange Market  The foreign exchange market has two segments OTC commercial and investment banks Securities exchanges

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-12 Global OTC Foreign Exchange Instruments  Global OTC foreign exchange instruments include Spot transactions Outright forward transactions FX swap Currency swaps Options Futures contracts

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-13 Global OTC Foreign Exchange Instruments Foreign Exchange Markets: Turnover by Instrument

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-14 Size, Composition, and Location of the Foreign Exchange Market  Market size is $4 trillion daily the U.S. dollar is the most important currency on the foreign-exchange market London is the main foreign exchange market in the world  The most commonly traded currency pairs are EUR/USD and USD/JPY

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-15 Size, Composition, and Location of the Foreign Exchange Market Foreign Exchange Markets: Average Daily Volume

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-16 Size, Composition, and Location of the Foreign Exchange Market Global Foreign Exchange: Currency Distribution

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-17 Size, Composition, and Location of the Foreign Exchange Market Foreign Exchange Markets: Geographic Distribution

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-18 Major Foreign Exchange Markets  Foreign exchange dealers quote rates Bid (buy) rate  the rate at which traders buy foreign exchange Offer (sell) rate  the rate at which traders sell foreign exchange Spread  the difference between bid and offer rates

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-19 Major Foreign Exchange Markets  American terms (direct quote) the number of dollars per unit of foreign currency  European terms (indirect quote) the number of units of foreign currency per dollar  Base currency  Terms currency

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-20 The Forward Market  Forward discounts when the forward rate is less than the spot rate  Forward premiums when the forward rate is greater than the spot rate  Option the right, but not the obligation, to trade a foreign currency at a specific exchange rate  Futures specifies an exchange rate in advance of the actual exchange of currency not as flexible as a forward contract

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-21 The Foreign Exchange Trading Process

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-22 Banks And Exchanges  The top banks in the inter-bank market in foreign exchange can trade in specific market locations engage in major currencies and cross-trades deal in specific currencies handle derivatives  forwards, options, futures, swaps conduct key market research

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-23 Banks And Exchanges Foreign Exchange Trades: Top Commercial Banks, 2011 Ranked by Overall Market Share

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-24 Top Exchanges For Trading Foreign Exchange  Three of the best-known exchanges are the Chicago Mercantile Exchange (CME) Group the NASDAQ OMX the NYSE Liffe

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-25 How Companies Use Foreign Exchange Learning Objective 5: To understand why companies deal in foreign exchange

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-26 How Companies Use Foreign Exchange  Import and export cash flow options Commercial bills of exchange  sight draft  time draft Letters of credit  confirmed letter of credit

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-27 How Companies Use Foreign Exchange  Other financial flows for business Speculation  buying or selling of a foreign currency that has an element of risk and a chance of great profits Arbitrage  the buying and selling of foreign currencies at a profit due to price discrepancies  interest arbitrage

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-28 Where Are Foreign Exchange Markets Headed?  More efficient markets create more opportunities for foreign exchange trading lower costs  Financial crisis in Europe future of the euro  Rise of the Chinese yaun and Brazilian real  Technology developments more electronic trades

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 9-29 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.