Download PowerPoint for Chapter 8 (Office 2003)

International
Business
Environments & Operations
15e
Daniels
●
Radebaugh
●
Copyright © 2015 Pearson Education, Inc.
Sullivan
8-1
Chapter 8
Global ForeignExchange Markets
Copyright © 2015 Pearson Education, Inc.
8-2
Learning Objectives





Learn the fundamentals of foreign exchange
Identify the major characteristics of the foreignexchange market and how governments control
the flow of currencies across national borders
Describe how the foreign-exchange market works
Examine the different institutions that deal in
foreign exchange
Understand why companies deal in foreign
exchange
Copyright © 2015 Pearson Education, Inc.
8-3
Introduction
Learning Objective:
Learn the fundamentals of foreign
exchange
Copyright © 2015 Pearson Education, Inc.
8-4
What Is Foreign Exchange?

Foreign exchange


Foreign exchange market


money denominated in the currency of another
nation or group of nations
where foreign exchange transactions take
place
Exchange rate

the price of a currency
Copyright © 2015 Pearson Education, Inc.
8-5
Players On The Foreign
Exchange Market
Learning Objective:
Identify the major characteristics of the
foreign-exchange market and how
governments control the flow of currencies
across national borders
Copyright © 2015 Pearson Education, Inc.
8-6
Players On The Foreign
Exchange Market

The Bank for International
Settlements (BIS) divides the market
into



Reporting dealers
Financial institutions
Nonfinancial institutions
Copyright © 2015 Pearson Education, Inc.
8-7
Players On The Foreign
Exchange Market
Foreign Exchange Markets: Turnover by Counterparty
Copyright © 2015 Pearson Education, Inc.
8-8
How To Trade
Foreign Exchange
Learning Objective:
Describe how the foreign-exchange
market works
Copyright © 2015 Pearson Education, Inc.
8-9
How To Trade
Foreign Exchange

Dealers can trade foreign exchange




Using electronic methods (41.3%)
Directly with customers (24.3%)
Through the interbank market (18.5%)
Through voice brokers (15.9%)
Copyright © 2015 Pearson Education, Inc.
8-10
Some Aspects Of The Foreign
Exchange Market

The foreign exchange market has two
segments


OTC commercial and investment banks
Securities exchanges
Copyright © 2015 Pearson Education, Inc.
8-11
Global OTC
Foreign Exchange Instruments

Global OTC foreign exchange instruments
include






Spot transactions
Outright forward transactions
FX swap
Currency swaps
Options
Futures contracts
Copyright © 2015 Pearson Education, Inc.
8-12
Global OTC
Foreign Exchange Instruments
Foreign Exchange Markets: Turnover by Instrument
Copyright © 2015 Pearson Education, Inc.
8-13
Size, Composition, and Location
of the Foreign Exchange Market

Market size is $4 trillion daily



the U.S. dollar is the most important currency
on the foreign-exchange market
London is the main foreign exchange market in
the world
The most commonly traded currency pairs
are EUR/USD and USD/JPY
Copyright © 2015 Pearson Education, Inc.
8-14
Size, Composition, and Location
of the Foreign Exchange Market
Foreign Exchange Markets: Average Daily Volume 1998-2013
Copyright © 2015 Pearson Education, Inc.
8-15
Size, Composition, and Location
of the Foreign-Exchange Market
Global Foreign Exchange: Currency Distribution
Copyright © 2015 Pearson Education, Inc.
8-16
Size, Composition, and Location
of the Foreign Exchange Market
Foreign Exchange Markets: Geographic Distribution
Copyright © 2015 Pearson Education, Inc.
8-17
Major Foreign
Exchange Markets

Foreign exchange dealers quote rates



Bid (buy) rate
 the rate at which traders buy foreign exchange
Offer (sell) rate
 the rate at which traders sell foreign exchange
Spread
 the difference between bid and offer rates
Copyright © 2015 Pearson Education, Inc.
8-18
Major Foreign
Exchange Markets

American terms (direct quote)


the number of dollars per unit of foreign currency
European terms (indirect quote)

the number of units of foreign currency per dollar
Base currency
 Terms currency

Copyright © 2015 Pearson Education, Inc.
8-19
The Forward Market

Forward discounts


Forward premiums


when the forward rate is greater than the spot rate
Option


when the forward rate is less than the spot rate
the right, but not the obligation, to trade a foreign
currency at a specific exchange rate
Futures


specifies an exchange rate in advance of the actual
exchange of currency
not as flexible as a forward contract
Copyright © 2015 Pearson Education, Inc.
8-20
The Foreign Exchange
Trading Process
The Foreign Exchange Trading Process
Copyright © 2015 Pearson Education, Inc.
8-21
Banks And Exchanges

The top banks in the inter-bank market in
foreign exchange can





trade in specific market locations
engage in major currencies and cross-trades
deal in specific currencies
handle derivatives
 forwards, options, futures, swaps
conduct key market research
Copyright © 2015 Pearson Education, Inc.
8-22
Banks And Exchanges
Foreign Exchange Trades: Top Commercial Banks, 2012
Ranked by Overall Market Share
Copyright © 2015 Pearson Education, Inc.
8-23
Top Exchanges For Trading
Foreign Exchange

Three of the best-known exchanges are



the Chicago Mercantile Exchange (CME)
Group
the NASDAQ OMX
the NYSE Liffe
Copyright © 2015 Pearson Education, Inc.
8-24
How Companies
Use Foreign Exchange
Learning Objective:
Understand why companies deal in foreign
exchange
Copyright © 2015 Pearson Education, Inc.
8-25
How Companies
Use Foreign Exchange

Import and export cash flow options


Commercial bills of exchange
 sight draft
 time draft
Letters of credit
 confirmed letter of credit
Copyright © 2015 Pearson Education, Inc.
8-26
How Companies
Use Foreign Exchange

Other financial flows for business


Speculation
 buying or selling of a foreign currency that
has an element of risk and a chance of great
profits
Arbitrage
 the buying and selling of foreign currencies
at a profit due to price discrepancies
 interest arbitrage
Copyright © 2015 Pearson Education, Inc.
8-27
Where Are Foreign Exchange
Markets Headed?

More efficient markets



create more opportunities for foreign exchange
trading
lower costs
Financial crisis in Europe

future of the euro
Rise of the Chinese yaun and Brazilian real
 Technology developments


more electronic trades
Copyright © 2015 Pearson Education, Inc.
8-28
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.
Copyright © 2015 Pearson Education, Inc.
8-29