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Foreign Exchange Introduction

The document discusses foreign exchange concepts including: 1) Foreign exchange involves exchanging one currency for another and includes spot transactions, outright forwards, FX swaps, derivatives like currency swaps, options, and futures contracts. 2) The main players in foreign exchange markets are reporting dealers, other financial institutions, and non-financial customers like governments and companies. 3) Foreign exchange is needed for international trade and investments, hedging risks, and arbitrage and speculative trading.

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Priyesh Tiwari
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11 views

Foreign Exchange Introduction

The document discusses foreign exchange concepts including: 1) Foreign exchange involves exchanging one currency for another and includes spot transactions, outright forwards, FX swaps, derivatives like currency swaps, options, and futures contracts. 2) The main players in foreign exchange markets are reporting dealers, other financial institutions, and non-financial customers like governments and companies. 3) Foreign exchange is needed for international trade and investments, hedging risks, and arbitrage and speculative trading.

Uploaded by

Priyesh Tiwari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 15

ERDIFEM

Priyesh Tiwari

Daniels, Radebaugh, Sullivan, Salwan 1


Topic of the Lecture:

FOREIGN EXCHANGE CONCEPTS

Daniels, Radebaugh, Sullivan, Salwan 2


Introduction
• Changing money from one currency to another
and moving it around to different parts of the
world is a serious business, both, on a personal
level and a company level

• In a domestic transaction, companies use only one


currency. In a foreign transaction, companies can
use two or more currencies
Daniels, Radebaugh, Sullivan, Salwan 3
What is Foreign Exchange?
• Foreign exchange is money denominated in the currency of
another nation or group of nations

• The market in which these transactions take place is the foreign


– exchange market

• Foreign exchange can be in the form of cash, funds available on


credit and debit cards, traveller’s cheques, bank deposits, or
other short-term claims

• An exchange rate is the price of currency. It is the number of


units of one currency that buys one unit of another currency
Daniels, Radebaugh, Sullivan, Salwan 4
Players on the F-E Market
• The Bank for International Settlements (BIS), a
central banking institution in Basel, Switzerland, is
owned and controlled by 55 member central
banks, divides the market into three major
categories:
– Reporting Dealers
– Other Financial Institutions
– Non-financial Institutions

Daniels, Radebaugh, Sullivan, Salwan 5


Players on the F-E Market
• Reporting Dealers, also known as ‘money centre
banks’ include large banks handle the maximum
volume of foreign exchange transactions

• They are influential in setting prices and are the


market makers

• Examples are: Deutsche Bank, UBS, Citi, RBS, Barclay’s


Capital, and HSBC
Daniels, Radebaugh, Sullivan, Salwan 6
Players on the F-E Market
• Other financial institutions include commercial
banks (other than the money centre banks), hedge
funds, pension funds, money market funds,
currency funds, mutual funds, specialized foreign-
exchange trading companies

• Non-financial customers include governments and


companies (MNEs and SME corporations as well)
Daniels, Radebaugh, Sullivan, Salwan 7
Some Aspects of F-E Markets
• The foreign exchange market has two major segments:
– Over The Counter (OTC) Market
– Exchange Traded Market

• The OTC market consists of commercial banks, investment banks


and other financial institutions

• The Exchange Traded Market is composed of securities


exchanges, such as CME Group, Philadelphia Stock Exchange,
London International Financial Futures & Options Exchange
(LIFFE), where certain types of foreign exchange instruments
are traded, like exchange traded futures and options

Daniels, Radebaugh, Sullivan, Salwan 8


A Primer on Forex Markets

• https://www.youtube.com/watch?v=ig_EO805rp
A

9
Traditional F-E instruments
• Spot Transactions
– Involves the immediate exchange of currency
– Generally transacted on the second business day after the date on
which the two foreign exchange dealers agree to transact
– The rate at which the transaction is settled is called ‘spot rate’
– For security reasons, both the legs of a spot transaction take place
on the same day, even if the calendar dates vary for T+2
settlements.
– This happens specially in case of Asian and European Currencies
against USD, but is not needed in the case of Canadian Dollar and
Mexican Peso

Daniels, Radebaugh, Sullivan, Salwan 10


Traditional F-E instruments
• Outright Forward Transactions
– Involves the exchange of currency on a future date
– It is the single purchase or sale of a currency lot for future delivery
– The rate at which the transaction is settled is called forward rate
– The forward transaction settlement date is determined as per the
spot rate settlement date of today
– Forward Contracts are available in maturity periods of 1 week, 2
weeks, 1, 2, 3, 6, 9 and 12 months

– All kinds of Forex transactions are settled using SWIFT (Society


for Worldwide Inter – Bank Financial Transactions)
Daniels, Radebaugh, Sullivan, Salwan 11
Traditional F-E instruments
• FX Swap Transactions

– In an FX Swap, one currency is swapped for another on


one date and then swapped back on a future date

– Most often, the first leg of a FX Swap is a spot


transaction, with the second leg of the swap as future
transaction

Daniels, Radebaugh, Sullivan, Salwan 12


Traditional F-E instruments
• Derivatives
– Currency Swaps
• Deals with interest bearing financial instruments (such as bonds),
and they involve the exchange of principal and interest payments
– Options
• The right but not the obligation to trade foreign currency in the
future
– Futures Contract
• An agreement between two parties to buy or sell a particular
currency at a particular price on a particular future date, as
specified in a standardized contract to all participants in that
currency futures exchange

Daniels, Radebaugh, Sullivan, Salwan 13


The Need of Forex Market
• International Trade & Investments

• Hedging the Risks

• Arbitrage & Speculation Trade

14
The Origin of Exchange Rates

• The Bretton Woods Conference & Nixon Effect

• China today, USA yesterday

15

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