Essay About Currency Composition And Fx Market

Fin 308 Test 1 Study Sheet
Chapter 5 FX Market:FUNCTIONS ♣ Transfer purchasing power between countries ♣ Obtain/provide credit for international trade transactions ♣ Minimize exposure to the risks of exchange rate changes PARTICIPANTS ♣ Bank & nonbank FX dealers ♣ Individuals and firms ♣ Speculators and arbitragers ♣ Central banks and treasuries ♣FX brokers FX MARKET SUMMARY ♣ Global trading day – 24 hours – Dominated by London and New York ♣ Market size – Daily global net turnover in the FX market was USD 5.3 trillion in April 2013 ─ more than 12 times the global equity markets – London and New York make up roughly 60% of the FX market – Asian markets growing more rapidly than European markets ♣ Currency composition – US $ involved in 86% of currency trading – USD/EUR and USD/JPY make up 42% of trading – Big three ($, €, ¥) total roughly 92% of tradingFX TRANSACTIONS ♣ Spot (cash) market – Immediate transfer of a commodity or financial security ♣ Forward market – An agreement made today to purchase or sell a currency at a future date – Typical maturities 1, 2, 3, 6 and 12 months – All terms (the good, price, future date) are agreed today – Both buyer and seller remove price risk – Outright forward: requires delivery of the specific amount of currency – Nondeliverable forwards (NDFs): settled in cash ♣ Futures – A standardized forward contract that is traded on a commodity or security on an exchange ♣ Options – An option gives the buyer or seller the right, but not the obligation to buy or sell, a certain quantity of the underlying asset (currency) at a predetermined (strike or exercise) price on or before the expiration date ♣ Swap transactions QUOTES ♣ A foreign exchange rate is the price of one currency expressed in terms of another currency CUR1/CUR2 ♣ CUR1 = base currency or one unit of the currency ♣ CUR2 = price currency or quote currency (??? units of the other currency) ♣ € 1.00 = $ 1.1008 ♣ EUROPEAN TERMS ♣ the amount of a foreign currency US $ 1.00 can buy ♣ US $ is priced in term of the foreign currency ♣ USD/CAD 1.2734 ♣ $ is base currency (1 unit) ♣ C$ is price currency (??? units) ♣ Most foreign currencies in the world are stated in terms of the number of units of foreign currency needed to buy US $ 1.00 ♣