Slide 1Foreign-Exchange MarketForeign-Exchange MarketTypes of Foreign-Exchange TransactionsTypes of Foreign-Exchange TransactionsTypes of Foreign-Exchange TransactionsDistribution of foreign-exchange transactions by U.S. banksInterbank TradingTop ten banks by share of foreign-exchange market, 2009Interbank TradingReading Foreign-Exchange QuotationsForeign exchange quotations (a)Foreign exchange quotations (b)Reading Foreign-Exchange QuotationsForward and Futures MarketsForward and Futures MarketsForward contract versus futures contractForward and Futures MarketsForward and Futures MarketsForward and Futures MarketsForeign currency futures, May 13, 2009: selected examplesForeign-Currency OptionsForeign-Currency OptionsForeign-Currency OptionsExchange-Rate DeterminationWEAK DOLLAR IS A BONANZA FOR EUROPEAN TOURISTSExchange-Rate DeterminationExchange-rate determinationExchange-Rate DeterminationExchange-Rate DeterminationSlide 31Nominal and Real Exchange RatesNominal and Real Exchange RatesNominal and Real Exchange RatesNominal and Real Exchange RatesExchange rate indexes of the U.S. dollar (March 1973 = 100)*ArbitrageArbitrageThe Forward MarketForward exchange rates: selected examplesThe Forward MarketThe Forward MarketThe Forward MarketExchange-rate risk: the hazard of investing abroadReturn on a three-month German investmentInterest ArbitrageInterest Arbitrageuncovered interest arbitrage: an exampleInterest ArbitrageInterest ArbitrageCovered interest arbitrage: an exampleForeign-Exchange Market SpeculationForeign-Exchange Market SpeculationHow to play the falling (rising) dollarForeign Exchange Trading as a CareerForeign Exchange© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐1PowerPoint slides prepared by:Andreea ChiritescuEastern Illinois UniversityForeign-Exchange Market•Foreign-exchange market •Organizational setting •Within which individuals, businesses, governments, and banks •Buy and sell foreign currencies and other debt instruments•Largest and most liquid market in the world•Dominated by four currencies•U.S. dollar, euro, Japanese yen, British pound© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐2Foreign-Exchange Market•Foreign-exchange market •Transactions between commercial banks and their commercial customers•Domestic interbank market conducted through brokers•Active trading in foreign exchange with banks overseas© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐3Types of Foreign-Exchange Transactions•Spot transaction •Make an outright purchase or sale of a currency now, as in “on the spot”•Simplest way to meet your foreign currency requirements•Greatest risk of exchange rate fluctuations© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐4Types of Foreign-Exchange Transactions•Forward transaction•Receiving or paying an amount of foreign currency on a specific date in the future •At a fixed exchange rate•Protects against unfavorable movements in the exchange rate•Will not allow gains to be made should the exchange rate move in your favor © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐5Types of Foreign-Exchange Transactions•Currency swap•Conversion of one currency to another currency at one point in time•With an agreement to reconvert it back to the original currency at a specified time in the future•The rates of both exchanges are agreed to in advance© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐6© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐7Distribution of foreign-exchange transactions by U.S. banksTABLE 11.1Interbank Trading•Retail transactions •Bank purchases from and sales to their customers •Less than 1 million currency units•Wholesale transactions•More than 1 million currency units•Between banks or with large corporate customers© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐8© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐9Top ten banks by share of foreign-exchange market, 2009TABLE 11.2Interbank Trading•Earning profits in foreign-exchange transactions•Bid rate - price that the bank is willing to pay for a unit of foreign currency•Offer rate - price at which the bank is willing to sell a unit of foreign currency•Spread - difference between the bid and the offer rate•A bank’s bid quote < its offer quote© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐10Reading Foreign-Exchange