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Chapter 6 Foreign Exchange And International Financial Markets - Coggle…
Chapter 6
Foreign Exchange And International Financial Markets
Differentiate Foreign Exchange
Market and Foreign Exchange
Foreign Exchange Market - a market where currencies are bought and sold in determined currency prices
Foreign Exchange - a commodity consists of currencies issued by countries other than one's own
Important to facilitate conversion of currencies and allow firms to conduct trade more efficient.
Foreign-Exchange Trading
What determines exchange rate?
Flexible exchange rate system set by demand & supply
Demand for a currency of a particular country is derived
e.g Price good is high = less demanded by foreign buyers, hence its currency is not demanded.
Residents must sell their currency to pay for foreign products.
Exchange rate will change if demand for one currency exceeded supply.
Currency worth
An exchange rate of how much one currency one must pay to receive a certain amount of another
Does not tell specific product's cost
Do not guarantee the buying power of our currency
Foreign-Exchange Quote
Direct Exchange Rate
Price of foreign currency in terms of home currency
RM3.30(base)/USD 1.00 (quote)
Indirect Exchange Rate
Price of home currency in terms of foreign currency
USD0.263(base)/RM1.00(quote)
Types of Exchange Rate System
Fixed Exchange Rate System
Flexible Exchange Rate System
Combination
Role of Banks
Buy or sell major traded currencies
Markets
Bank Foreign Exchange Clients
Commercial Customers
Speculators
Arbitrageurs
Spot & Forward Market
Forward Market
Consists of foreign-exchange transactions that occur sometime in the future.
Prices are often published for foreign exchange (30/90/180 days in the future)
Spot Market
Consists of foreign-exchange transactions
Account for 33% of all foreign-exchange transactions
Swap Transaction
A transaction where same currency is bought & sold simultaneously.
Mechanisms for Future
Foreign Exchanges
Currency future
Currency option
Arbitrage
A riskless purchase of a product in one market for immediate resale in a second market
Arbitrage of Goods
Arbitrage of Money
Arbitrage of Money
Two Point
Three-Point
Covered-Interest
Arbitrage of Goods
Purchasing Power Parity
The International Capital Market
A network of individuals, companies, financial institutions & governments
Consists of both formal exchanges and electronic networks
Purposes:-
Expand money supply for borrowers
Reduce cost of money to borrowers
Reduce risk for lenders
Major International Bank
Correspondent Banking
Overseas Banking Operation
Commercial Banking Services
Investment Banking Services
Establishment of Overseas
Banking Operations
Subsidiary Bank
Branch Bank
Affiliated Bank
The
Eurocurrency
Market
Originated in 1950s
Eurodollars (US dollars deposited in European bank accounts
Eurocurrency is a currency on deposit outside in banks worldwide
Euroloans quoted on basis of LIBOR
The International Bond Market
Major source of debt financing for:-
World's governments
International organizations
Larger firms
2 types of bonds
Foreign Bonds
Eurobonds
Global Equity Markets
Start up companies are no longer restricted to raise new equity
Development of country funds
Offshore Financial Centers
Offer banking and other financial services to nonresident customers
Location: Bahamas, Bahrain, the Cayman Islands, Bermuda, the Netherlands Antilles, Singapore, Luxembourg, Switzerland