1. 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 xiongjc-p@163.com

2. 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

3. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 3 2.1 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

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

5. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 5 2.1 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 1980s19932004 $10-$20 billion$5001 trillion1.9 trillion

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

7. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 7 2.1 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

8. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 8 2.1 The Organization of the Foreign Exchange Market Computerized Trading Systems - Dealing 3000 (Reuters, 1992) - Electronic Brokering Service (EBS, 1993) The Competitive Marketplace

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

10. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 10 2.2 Currency Quotes and Prices Currency Quotes and Prices: Overview Exchange Rates Exchange Rate Quotes Vehicle Currencies and Currency Cross-Rates Triangular Arbitrage

11. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 11 2.2 Currency Quotes and Prices Exchange Rates Exchange Rate Quotes Direct quotes Indirect Quotes European Quote American Quote Dollar price of a foreign currency

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

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

14. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14 2.2 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

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

16. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 16 2.2 Currency Quotes and Prices Triangular Arbitrage An arbitrage process involving three currencies - EUR 1.4381 / GBP - EUR 0.8408 / USD - USD 1.7395/ GBP

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

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

19. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 19 2.3 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

20. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 20 2.3 Inside the Interbank Market I: Bid-Ask Spreads and Bank Profits Introduction Bid rate Ask Rate Bid-Ask Spread Bid-Ask Spreads Offer Price

21. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 21 2.3 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

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

23. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 23 2.4 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)

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

25. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 25 2.4 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

26. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 26 2.5 Describing Changes in Exchange Rates Introduction Appreciation Depreciation Devaluations Revaluations Rates of Appreciation and Depreciation

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

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