EECS 1530 Lecture Notes - Lecture 34: Peruvian Sol, Foreign Exchange Market
21 Jun 2018
School
Course
Professor
EECS 1530 Lecture 34 Notes
Introduction
Spot Market Liquidity
Events occurring before the U.S. market opened could have changed the supply and
demand conditions for British pounds in the London foreign exchange market, reducing
the quoted price for the pound.
Several U.S. banks have established so-called night trading desks.
The largest banks initiated night trading to capitalize on overnight foreign exchange
movements and to accommodate corporate requests for currency trades.
Even some medium-sized banks now offer night trading as a way of accommodating
their corporate clients.
The spot market for each currency is characterized by its liquidity, which reflects the
level of trading activity.
The more buyers and sellers there are the more liquid a market is.
The spot markets for heavily traded currencies such as the euro, the pound, and the yen
are extremely liquid.
In contrast, the spot markets for currencies of less developed countries are much less
liquid.
A currency’s liquidity affects the ease with which it can be bought or sold by an MNC.
If a currency is illiquid, then the number of willing buyers and sellers is limited and so an
MNC may be unable to purchase or sell that currency in a timely fashion and at a
reasonable exchange rate.
EXAMPLE
Bennett Co. sold computer software to a firm in Peru and received payment of 10
million units of the nuevo sol (Peru’s currency).
Bennett Co. wanted to convert these units into dollars.
The prevailing exchange rate of the nuevo sol at the time was $.36.
Document Summary
Events occurring before the u. s. market opened could have changed the supply and demand conditions for british pounds in the london foreign exchange market, reducing the quoted price for the pound. Mnc may be unable to purchase or sell that currency in a timely fashion and at a reasonable exchange rate. Bennett co. sold computer software to a firm in peru and received payment of 10 million units of the nuevo sol (peru"s currency). Bennett co. wanted to convert these units into dollars. The prevailing exchange rate of the nuevo sol at the time was $. 36. However, the company"s bank did not want to receive such a large amount of nuevo sol because it expected that none of its customers would need that currency. The u. s. market opened could have changed the supply and demand conditions for. British pounds in the london foreign exchange market, reducing the quoted price for the pound.
