ppt (foreign exchange market-part1).pdf

8/19/2019 PPT (Foreign Exchange Market-Part1).pdf

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International Finance

Foreign Exchange Market (Part 1)


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Forex Market: Rational for Existence

Purpose of existence of forex market:

Assist international trade and investment

Facilitates hedging and makes possiblespeculation in foreign currency

Most forex transactions channeled throughthe worldwide interbank market


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Foreign Exchange Trading

Trading done by phone, telex or online on 24-hour basis (except weekends)

Trading moves from Asia to Europe to North America

No unified or centrally cleared market formajority of FX trade and very little cross-border regulation


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Foreign Exchange Trading

Main trading center: London.

Other important centers:

NY, Tokyo, HK, Singapore


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Top Currencies Traded

Most actively traded currencies:

US$

Euro

Yen

Pound Sterling

Swiss Franc


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Top Forex Traders

Top 5 currency traders:

Deutch Bank

Union Bank of SwitzerlandBarclay’s Capital

Citi

Royal Bank of Scotland


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Philippine Forex

Philippine Foreign Exchange

BSP dollar reference dollar exchange rate forthe day represents the weighted average of alldone deals at PDS during the preceding day

KBs give two-way quotes with the normalinterbank bid-offer spread of 0.0005 pesos


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Forex Quotes

Spot price

30-day forward quote




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Types of Forex Quotes

American term : US$ per unit of foreign currency

European term : foreign currency unit per US $

Direct quote : domestic currency price of foreigncurrency

Indirect quote : foreign price of domestic currency


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Forex Conversions : Basic

E.g. SFr 1 = US$ 0.7967 is converted to


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Forex Conversions : Bid-Ask

Quotes always given in pairs as a dealer wouldnot know if a client is in the market to buy or sellcurrency

First rate quoted: buy/bid price

Second rate quoted: sell/ask/offer price

E.g. Pound Sterling quote :

£: US$ 1.7442 - 53

dealer’s buying rate dealer’s selling rate

client’s selling rate client’s buying rate


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Sample Dealer Quotes

Quotes by different banks vary and the choice ofclients would depend on the best quote by eachdealer

E.g.: A US portfolio manager wants to buy $10 million

worth of European (French) bonds. He seeks

quotes on the euro/dollar rate from different banks

Bank A Bank B Bank C0.80000-20 0.79985-05 0.79995-15


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Bid-Ask Quotes

When direct quotations are converted intoindirect quotations, the bid-ask quotes are

reversed

In US forex market In UK forex marketUS$ 1.7442-53 per UK£ UK£ 0.5730-33 per US$


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Transaction Costs

Transaction Costs:

Percent Spread =

Midpoint Price =


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Sample Exercise

Given the following quote:

$ 0.9056 – 0.9065 / €

Convert the quote to €/$ bid-ask quote

Compute for the $/ € spread and midpoint price. Compute for the €/$ spread and midpoint price


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Midpoint of a Spread

The midpoint of a spread moves in response to adealer’s position. A dealer with excess supply of

the foreign currency would move the midpoint ofhis direct quote downwards rather than adjust the

size of the spread

Assume the ff €/$ quotes of different banks:

Bank A Bank B Bank C

0.80000-20 0.79985-05 0.79995-15

0.80010 0.79995 0.80005


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Cross Exchange Rates

Cross Rates

Using midpoint quotes Assume FC1 = currency of foreign country 1 ( €)

FC2 = currency of foreign country 2 (SFr)DC = currency of domestic country (US$)

If € is selling for US$ 1.20/ € and the buying rate for SFr

is US$ 0.80/SFr,

what would the SFr/ € cross exchange rate be?

what would the €/SFr cross exchange rate be?


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For the SFr/ € cross exchange rate


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For the €/SFr cross exchange rate


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Given the ff. quotes:

Japanese ¥ : ¥ 135.62/US$

South Korean Won : W 763.89/US$

Assume : FC1 = ¥

FC2 = W

DC = US$


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For the ¥/W cross exchange rate


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For the W/¥ cross exchange rate

ppt (foreign exchange market-part1).pdf

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