EECS 1530 Lecture Notes - Lecture 31: United States Dollar, Japanese Yen, Foreign Exchange Market
21 Jun 2018
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EECS 1530 Lecture 31 Notes
Introduction
Spot Market
In recent years, new trading platforms have been established that allow some MNCs to
engage in foreign exchange transactions directly with other MNCs, thereby eliminating
the need for a foreign exchange dealer.
An MNC that subscribes to such a platform can indicate to the platform’s other users
whether it wants to buy or sell a particular currency as well as the volume desired.
Some MNCs continue to use a foreign exchange dealer, often because they prefer
personal attention or require more customized transactions than can be handled via
trading platforms.
The average daily trading volume in the foreign exchange market is about $4 trillion.
The U.S. dollar is involved in about 40 percent of those transactions, and currencies
from emerging countries are involved in about 20 percent of them.
Most currency transactions between two non-U.S. countries do not involve the U.S.
dollar.
For example, a Canadian MNC that purchases supplies from a Mexican MNC exchanges
its Canadian dollars for Mexican pesos
Likewise, a Japanese MNC that invests funds in a British bank exchanges its Japanese
yen for British pounds.
The most common type of foreign exchange transaction is for immediate exchange.
The market where these transactions occur is known as the spot market.
The exchange rate at which one currency is traded for another in the spot market is
known as the spot rate.
Spot Market Structure
Document Summary
In recent years, new trading platforms have been established that allow some mncs to engage in foreign exchange transactions directly with other mncs, thereby eliminating the need for a foreign exchange dealer. The market where these transactions occur is known as the spot market. The exchange rate at which one currency is traded for another in the spot market is known as the spot rate. Commercial transactions in the spot market are often completed electronically, and the exchange rate at the time determines the amount of funds necessary for the transaction. New trading platforms have been established that allow some mncs to engage in foreign exchange transactions directly with other mncs, thereby eliminating the need for a foreign exchange dealer. An mnc that subscribes to such a platform can indicate to the platform"s other users whether it wants to buy or sell a particular currency as well as the volume desired.
