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GMS 724 Study Guide - Midterm Guide: Bank, Futures Contract, Cme Group

Global Management Studies
Course Code
GMS 724
Study Guide

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Chapter 8 - Foreign-Exchange Trading Process
When a company sells goods or services to a foreign customers and receives
foreign currency, it needs to convert that currency into the domestic currency
o When importing, the company needs to convert domestic to foreign
currency to pay the foreign supplier
o This conversion usually takes place between the company and its bank
Originally, the commercial banks provided foreign-exchange services for their
o Eventually, some of the commercial banks in New York and other U.S.
money centers, such as Chicago and San Francisco began to look at
foreign-exchange trading as a major business activity instead of just a
o They become intermediaries for smaller banks by establishing
correspondent relationships with them
o They also become major dealers in foreign exchange
The Foreign-Exchange Trading Process
Let's say that you're U.S. Company A, that you've received euros in payment
for goods, and that you want to sell your euros in return for dollars. To make
the exchange, you may contact your local bank or go directly to a money
center bank.
On the other hand, perhaps you're U.S. Company B and you expect to
receive euros as a future payment. To protect yourself against fluctuations in
the exchange rate, you want to buy euros that you can subsequently trade
back for dollars. You could choose, say a forward or a swap, and your path
would essentially be a mirror image of Company A's.
Finally, either Company A or Company B could choose to convert by such
means as an option or a futures contract---in which case the trade could be
made an options and/or future exchange, either directly or through a broker
In the chart below, the left side shows what happens when U.S. Company A
needs to sell euros for dollars
o This situation could arise when A receives payment in euros from a
German importer
o The right side of the figure shows what happens when A needs to buy
euros with dollars
o This situation could arise when a company has to pay euros to a German
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