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Lecture 9

BUEC342 Lecture 9: Chapter 9

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Department
Business Economics
Course
BUEC342
Professor
Runjuan Liu
Semester
Winter

Description
Ob Describe the functions of the foreign exchange market Understand th nature of the foreign hang Understand the diff g ha hang determined and their relative merits. dentify th ts of diffe ches toward exchang e rate forecasting and ppl understand the issues surrounding currency convertibility Introduction What happens in the foreign exchange market can h ndamental impact on the sales, profits, and strategy of an enterpris Accordingly, it is very important for managers to understand how changes in currency chang ght affect th Definitions Foreign Exchange: isa market for converting the currency of one country into that of another count Exchange Rate: is the rate at which one currency is converted into anothe Foreign Exchange Risk: is the adverse consequence of unpredictable changes in the Market intangibe exchange rate Functions of the Foreign Exchange Market The foreign exchange market has two main functions: .I. To convert the currency of one country into the currency of another To provide some insurance against foreign exchange risk. FX market and International Business ports pany g agree. broad Payments for products or services coming from abroad; Short/long-term investments in foreign markets; Currency speculation: typically involves the short-te movement of funds from one the hope of profiting fr shifts chang Insuring Against Foreign Exchange Risk Sp xchange rates Forward exchange rates 3. C ency Swaps Spot exchange rates The sp hang hich a f ign exchange deal day, cy into part r currency o Canadi bank rt her Canadian d to pounds that day. dan t hang the sp the nisk Market Tra sh fi buys a U.S. prod U.S. fi hich req U.S paym h fi cts its bank, gets a q the d hang approves it. 3. The British firm instructs its bank to take pounds from its checking account, convert doll d transfer the the U.S. prod 4. The tish bank instructs its pond bank in N York U.S. do from its account and pay the U.S. producer by transferring them to the producer's bank contract -yy ppudar hang A fo rd exchang hen two partie chang cy and deal at some specific date in the future. g such fu ferred d exchange Rates fo 8o da the fur me pes pools p is th purch exchange for two different value dates The foreign exchange market (FX) Global network of banks, brokers and foreign exchange d connected by Two major features of the foreign exchange market: The market never sleeps Ob Describe the functions of the foreign exchange market Understand th nature of the foreign hang Understand the diff g ha hang determined and their relative merits. dentify th ts of diffe ches toward exchang e rate forecasting and ppl understand the issues surrounding currency convertibility Introduction What happens in the foreign exchange market can h ndamental impact on the sales, profits, and strategy of an enterpris Accordingly, it is very important for managers to understand how changes in currency chang ght affect th Definitions Foreign Exchange: isa market for converting the currency of one country into that of another count Exchange Rate: is the rate at which one currency is converted into anothe Foreign Exchange Risk: is the adverse consequence of unpredictable changes in the Market intangibe exchange rate Functions of the Foreign Exchange Market The foreign exchange market has two main functions: .I. To convert the currency of one country into the currency of another To provide some insurance against foreign exchange risk. FX market and International Business ports pany g agree. broad Payments for products or services coming from abroad; Short/long-term investments in foreign markets; Currency speculation: typically involves the short-te movement of funds from one the hope of profiting fr shifts chang Insuring Against Foreign Exchange Risk Sp xchange rates Forward exchange rates 3. C ency Swaps Spot exchange rates The sp hang hich a f ign exchange deal day, cy into part r currency o Canadi bank rt her Canadian d to pounds that day. dan t hang the sp the nisk Market Tra sh fi buys a U.S. prod U.S. fi hich req U.S paym h fi cts its bank, gets a q the d hang approves it. 3. The British firm instructs its bank to take pounds from its checking account, convert doll d transfer the the U.S. prod 4. The tish bank instructs its pond bank in N York U.S. do from its account and pay the U.S. producer by transferring them to the producer's bank contract -yy ppudar hang A fo rd exchang hen two partie chang cy and deal at some specific date in the future. g such fu ferred d exchange Rates fo 8o da the fur me pes pools p is th purch exchange for two different value dates The foreign exchange market (FX) Global network of banks, brokers and foreign exchange d connected by Two major features of the foreign exchange market: The market never sleepso Market is highly integrated big payeos FX MARKET VS OTHER MARKETS S437,4 Size of Forex market $2.5 trillion $5.3 trillion UK economic output Forex market trade Source World aank, Bank for Intamatonal Settements Hierarchy of international financial centers Global Money Trading locations The world's key money trading centres are London, the biggest New York, Tokyo. Singapore. Major secondary trading centres include kfurt Hong Kong San Francisco, Sydney. London London's dominance is explained by: History (capital of the first major industrialized nation). Geography (between Tokyo/Singapore and New York .lank eash o London's central position between Tokyo and Singapore to the east and N York to the west has made it the critical link between the East Asian and New York markets. o Due to time zone differences, London opens soon after Tokyo closes for the night and is still open for the first few hours of trading in New York. Economic theories of exchange rate determination Exchange rates are determined by the demand and supply of one currency relative to the demand and supply of another Price and exchange rates: o Law of One Price Purchasing Power Parity (PPP) o Money supply and price inflation Law of one price In competitive markets free of transportation costs and trade barriers, identical o Market is highly integrated big payeos FX MARKET VS OTHER MARKETS S437,4 Size of Forex market $2.5 trillion $5.3 trillion UK economic output Forex market trade Source World aank, Bank for Intamatonal Settements Hierarchy of international financial centers Global Money Trading locations The world's key money trading centres are London, the biggest New York, Tokyo. Singapore. Major secondary trading centres include kfurt Hong Kong San Francisco, Sydney. London London's dominance is explained by: History (capital of the first major industrialized nation). Geography (between Tokyo/Singapore and New York .lank eash o London's central position between Tokyo and Singapore to the east and N York to the west has made it the critical link between the East Asian and New York markets. o Due to time zone differences, London opens soon after Tokyo closes for the night and is still open for the first few hours of trading in New York. Economic theories of exchange rate determination Exchange rates are determined by the demand and supply of one currency relative to the demand and supply of another Price and exchange rates: o Law of One Price Purchasing Power Parity (PPP) o Money sup
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