CH 7: The foreign exchange market 1

Foreign Exchange Market Did you know that the foreign exchange market (also known as FX or forex) is the largest market in the world? In fact, over $5.3 trillion is traded in the currency markets on a daily basis. (2013) (5,300,000,000,000,000) What is exchange rates (e or E) and why some fluctuate while others do not. 2

To buy foreign goods or services, or to invest in other countries, companies and individuals may need to first buy the currency of the country with which they are doing business. Generally, exporters prefer to be paid in their country’s currency or in U.S. dollars, which are accepted all over the world. 3

When Canadians buy oil from Kuwait for example, they may pay in U.S. dollars and not in Canadian dollars or KDs, even though the United States is not involved in the transaction. 4

The foreign exchange market, or the "FX" market, is where the buying and selling of different currencies takes place. The price of one currency in terms of another is called an exchange rate. 5

The market itself is actually a worldwide network of traders, connected by telephone lines and computer screens— there is no central headquarters. There are three main centers of trading, which handle the majority of all FX transactions—United Kingdom, United States, and Japan. 6

Transactions in Singapore, Switzerland, Hong Kong, Germany, France and Australia account for most of the remaining transactions in the market. 7

Trading goes on 24 hours a day: at 8 a.m. the exchange market is first opening in London, while the trading day is ending in Singapore and Hong Kong. At 1 p.m. in London, the New York market opens for business and later in the afternoon the traders in San Francisco can also conduct business. As the market closes in San Francisco, the Singapore and Hong Kong markets are starting their day. 8

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Spot Market vs. Forward Market Spot market involves purchase and sale of currencies for current delivery (actually takes about two days to clear) Forward market involves purchase and sale of currencies for future delivery (one-month, three-month, six month contracts) ◦ provide means of hedging against risk 10

Exchange Rates Bid price is the banks’ buying price -what they will pay Ask price is the banks’ selling price - what they will sell for The “spread” is the difference between bid and ask prices, covers transaction costs + profit for bank; typically around 0.1 percent 11

Today’s EX rates: KD/ $ Dep. KD/ ¥ KD/ € App.

13 KD to $ - 5 years

KD to € - 5 years 14

Exchange Rates Flexible (Floating) Exchange Rates ◦ Determined by market forces of supply and demand ◦ Fluctuate from hour to hour, day to day, etc. ◦ Currencies of most major trading nations now float ◦ Wall Street Journal reports exchange rates (relative to the U.S. dollar) for over 40 currencies every day 15

The following slides will provide more information Check: Currency info: q9_ q9_ Currency converter: converter/#from=USD;to=EUR;amt=1 converter/#from=USD;to=EUR;amt=1 16