1. The Foreign Exchange Market International Business (MB 92)

2. The Foreign Exchange Market Characteristics 24 Hour Global OTC Market Principal Centers TokyoLondonNew York Volume: $1.3 trillion daily, up from $100 billion in the 1980s Main Participants Users Market Makers

3. Participants Users Multinationals Institutional Investors Speculators—92% of the daily market activity driven by speculation Trading Companies Individuals Market Makers Commercial Banks Investment Banks Central Banks Exchanges

4. Major Trading Centers Percentage of Market London32% New York18% Tokyo 8% Singapore 7% Europe55% Asia26% North America19%

5. Currency Composition

6. Types of Instruments in the FX Market

7. Types of Foreign Exchange Trades Spot Trade--The Standard Trade For delivery of currency bought and sold two business days from trade date Forward Trade For delivery of both currencies more than two business days from trade date Swap Trade Simultaneous buying and selling of a currency with different maturities (usually from spot to a forward date)

8. Exchange Rate Quotations “Direct,” “American,” or “Normal Quotations ¥1 = $0.007547 THB1 = $0.02265 Price of domestic currency per unit of foreign currency “Indirect,” “European,” “Reciprocal”, or “Volume” Quoatations $1 = ¥132.50 $1= THB44.15 Effectively quotes the volume of foreign currency purchased by fixed quantity of domestic currency

9. Currency Prices Spot Agree on price today, settle two business days later BidOffer Yen per US $134.42134.60 TraderBuys US $ Sells US $ ClientSells US $Buys US $ Thai Baht/$44.1544.19 TraderBuys US $ Sells US $ ClientSells US $Buys US $

10. Currency Prices BidOffer U.S. Dollar/¥0.0075410.007547 TraderBuys ¥ Sells ¥ ClientSells ¥Buys ¥ U.S. Dollar/THB0.022630.02265 TraderBuys THB Sells THB ClientSells THBBuys THB

11. Exchange Rate Determination Meaning of Exchange Rate Appreciation/Depreciation of a Currency Determination of Exchange Rates—Forces of Demand and Supply Factors that influence exchange rates Inflation Rates Interest Rates Income Levels Government Controls

12. Exchange Rate Systems Fixed Exchange Rate Systems Floating Exchange Rate Systems Managed Float Pegged Exchange Rate Systems