Foreign Exchange Market by Edu Pristine

Author of lecture Foreign Exchange Market

Edu Pristine

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... direct dealing, foreign exchange brokers & electronic systems. Define the trading terms “mine” and “yours”. Define the trading term “big figure”. Define a cross-rate and a cross-trade. Calculate a cross-rate given two exchange rates. Describe some economic factors that might affect exchange rates. Discuss central bank intervention. Discuss spot ...

... It operates globally, through telephone and computer systems that link banks and other currency traders. The three major financial centres are London, New York and Tokyo. This decentralisation makes it extremely difficult to regulate the market. There is no true ‘regulator’ of foreign exchange markets, although the Bank for International Settlements (BIS) collects data on foreign exchange market activity. Regulating, with associations such as the International Swaps and Derivatives Association (ISDA) playing an important role in fostering high standards of commercial conduct and promoting sound risk management practices. 3. Introduction. Continuous: Price quotes in the interbank foreign exchange market vary continuously. They are quoted in bid/offer price format. Open bid: the bank that provides the quotation (bid/offer price) is open to buy or sell, even the amount of the transaction is also left open. Typical price quotations are for trades worth US$5 10 million or equivalent. Double auction: Banks that receive calls for quotations also call other banks and ask for their market, that is, their buy (bid) and sell (ask) ...

... trade that involves selling MXN for USD and then selling USD for HKD. The quote that is supplied for this trade would be derived from the two currencies quotes versus the US dollar. Big figure: Traders have special ways of quoting bid and offer prices for foreign currencies. For example for quote 1.5599-1.5604, the trader wont waste his and the caller’s time by saying ‘one fifty-five ninety-nine’ and ‘one fifty-six-oh-four’, but would rather quote only the last two decimal places, or points, as in ‘ninety-nine’ and ‘oh-four’. 5© Neev Knowledge Management - Pristine is the number of domestic currency units that can be purchased with one foreign currency unit. For example: C$1.5873 per US dollar is a direct terms quote from the perspective is the number of foreign currency units that can be purch ased with one domestic currency unit. Indirect quote is a reciprocal of a direct terms quote, i.e. Most foreign currencies are not traded or quoted directly against one another. For ...

... on the amount of Acts as a middleman, bringing together two banks that have expressed an interest in buying or selling a currency at a specific price. For this service, brokers charge both the buyer and the seller a commission based on the size of the deal. This helps the banks to maintain relationships other banks at economical costs. Banks submit bids and offers for pairs of currencies to the brokers and the brokers disseminate the orders to their respective networks. They do this by broadcasting the best bids and offers in various currencies over speakers that ar e physically located at a bank’s trading desk. When a trader wants to execute a deal based on the prices that are being broadcast, they will shout back to the broker via an open, direct telephone line, ‘mine’ that (I want to sell the currency). The use of a broker guarantees anonymity to the buyer and seller. This is important to the trading process, because traders usually prefer not to reveal their position or market view to ...

... at times liquidity dries up. 9© Neev Knowledge Management - Pristine. Some economic factors that might affect exchange rates Foreign exchange rates have strong, long-term relationships with a country’s identifiable economic fundamentals. These include: GDP; rate of inflation; productivity; interest rates; employment levels; balance of payments; and current account balance. Foreign exchange traders tend to have a shorter-term view and work within certain limits. They have to meet profit targets that may be daily, weekly or monthly, so they react to events that influence a currency in the shorter term. One factor that influences the value of a currency in the short term is the general level of liquidity. Markets usually exhibit a certain degree of fluidity, but at times liquidity dries up. 9. Some economic factors that might affect exchange rates. Central Bank Intervention: Central banks (CBs) carry enormous clout in the foreign exchange markets but they usually exercise their power cautiously. Most CBs try to keep ...

... that the currency of a country with a low interest rate should trade at a forward premium relative to the currency of a country with a high interest rate. Interest parity effectively eliminates the interest-rate differential between countries after foreign exchange risk has been eliminated with a forward contract. When interest covered interest differential: that is, the difference between the interest rate in one country and the interest rate in another country, combined with a forward contract. Fair value forward exchange ratethat eliminates risk arbitrage, assuming equal borrowing and lending rates and no bid where F X/Yis the n-day forward exchange rate for currency Y in terms of currency X, Sspot exchange for currency Y in terms of currency X, r currencies X and Y respectively. ... © Neev Knowledge Management - Pristine means that the currency of a country with a low interest rate should trade at ...

... Rs 45 million and invest them in India at 8 %, he gets 45 and buy US dollars forward, i.e. 45.9/45.45 = $1.01, which is equivalent to the loan he has to repay, so no arbitrage profit. 13© Neev Knowledge Management - Pristine the Rs45/USD and the 3 months interest rates are 8 % and 4 % in India and US respectively, then the Rs should depreciate Vis a Vis USD, else there are arbitrage opportunities, where market participants will borrow from US at 4 % and invest in India at 8 %. The 3 month forward rate that will remove the arbitrage opportunity between India and US: If A borrows $1 million from US at 4 % for 3 month [Amount to be paid (1+ 0.04/4) = $1.01 million]. He sells USD and buy Rs spot market i.e. Rs 45 million and invest them in India at 8 %, he gets 45 × (1 + 0.08/4) = Rs 45.9. Then he sell Rs i.e. 45.9/45.45 = $1.01, which is equivalent to the ...

... The domestic currency most likely is the focal point of th e whole trading operation and a chief or senior trader is responsible for generating a certain profit figure for the trading operation. Based on the risk profile, certain traders may be assigned to work with other currencies that represent the bank’s interests or for which the bank has economies of scale. Forward desk is staffed by employees who trade and manage the bank’s forward currency positions, depending on its scope of operation, it may also be involved in other banking operations, such as the money market or funding desk. A chief trader usually manages the spot desk and the for ward foreign exchange desk. These two desks are responsible for trading, as opposed to advisory services to clients. 16© Neev Knowledge Management - Pristine. Structure of a Foreign Exchange Operation. Most foreign exchange operations have the following structure: consists of several employees who trade various currencies on a spot basis in. The domestic currency most likely is the focal point ...

... and the retail business from the branch network. 17© Neev Knowledge Management - Pristine. Structure of a Foreign Exchange Operation. This desk is responsible for trading exchange-traded or OTC Foreign exchange advisory services or sales desk: The role of this desk’s account executives is to attract new forex business or clients to the bank, provide professional services to existing clients, and provide pricing for clients. The sales desk can be broken down into three subcategories: institutional coverage to larger, more sophisticated accounts, such as governments or money managers; corporate or commercial accounts; and the retail. 17. Structure of a Foreign Exchange Operation (Cont0). Back office: All the dealing operations in the front office are supported by ...

... Answer: B. If an investor borrows $10 million from US at 6 % for 3 month. Amount to be paid : 10,000,000 ×(1+ 0.06/4) = $10.15 million. By investing in India at 9 %, he gets 500. The 3 month forward rate = [50 ×(1+ 0.09/4)](1+ 0.06/4) = Rs. 51.90. Then he sells Rupees and buys US dollars forward, is less than the amount of loan (i.e. $10.15 million) that he has to repay, so arbitrage loss. 20© Neev Knowledge Management - Pristine. 3. Rs50/USD and the 3 months interest rates are 9 % and 6 % in India and US respectively. If an investor buys $10 million from US and invests in India for 3 months, what ...

... which forward market transactions can occur after the trade date? A. 6 month. B. 5 year. C. 1 year. D. ...