Multinational Financial
Management
Alan Shapiro
7th Edition
Power Points by
J.Wiley & Sons
Joseph F. Greco, Ph.D.
California State University, Fullerton
1
CHAPTER 7
THE FOREIGN
EXCHANGE
MARKET
2
CHAPTER OVERVIEW
I.
II.
INTRODUCTION
ORGANIZATION OF THE
FOREIGN EXCHANGE
MARKET
III. THE SPOT MARKET
IV. THE FORWARD MARKET
3
PART I. INTRODUCTION
I. INTRODUCTION
A. The Currency Market:
where money denominated in one
currency is bought and sold with
money
denominated in another
currency.
4
INTRODUCTION
B. International Trade and Capital
Transactions:
facilitated with the ability
to transfer purchasing power
between countries
5
INTRODUCTION
C.
Location
1.
OTC-type: no specific
location
2.
Most trades by phone,
telex, or SWIFT
SWIFT: Society for Worldwide Interbank
Financial
Telecommunications
6
PART II.
ORGANIZATION OF THE FOREIGN
EXCHANGE MARKET
I . PARTICIPANTS IN THE FOREIGN
EXCHANGE MARKET
A. Participants at 2 Levels
1. Wholesale Level (95%)
- major banks
2. Retail Level
- business customers
7
ORGANIZATION OF THE FOREIGN
EXCHANGE MARKET
B.
Two Types of Currency Markets
1. Spot Market:
- immediate transaction
- recorded by 2nd business
day
8
ORGANIZATION OF THE FOREIGN
EXCHANGE MARKET
2. Forward Market:
- transactions take place at a
specified future date
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ORGANIZATION OF THE FOREIGN
EXCHANGE MARKET
C. Participants by Market
1.
Spot Market
a. commercial banks
b. brokers
c. customers of commercial
and central banks
10
ORGANIZATION OF THE FOREIGN
EXCHANGE MARKET
2. Forward Market
a. arbitrageurs
b. traders
c. hedgers
d. speculators
11
ORGANIZATION OF THE FOREIGN
EXCHANGE MARKET
II. CLEARING SYSTEMS
A. Clearing House Interbank
Payments System
(CHIPS)
- used in U.S. for electronic
fund transfers.
12
ORGANIZATION OF THE FOREIGN
EXCHANGE MARKET
B. FedWire
- operated by the Fed
- used for domestic...