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Final

GMS 724 Study Guide - Final Guide: Hong Kong Dollar, South African Rand, Japanese Yen


Department
Global Management Studies
Course Code
GMS 724
Professor
HOWARD LIN
Study Guide
Final

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Chapter 8 - Some Aspects of the Foreign-Exchange Market: Part 3
Frequently Traded Currency Pairs
Another way to consider foreign currency trades is to look at the most frequently
traded currency pairs
o The top seven pairs in the 2010 BIS Survey involved the U.S. dollar, with
the top two being euro/dollar (EUR/USD)---28 percent of the total---and
dollar/yen (USD/JPY)
o Because of the importance of the dollar in foreign-exchange trade, the
exchange rate between two currencies other than the U.S. dollar is known
as cross rate
o For example, the exchange rate between the Swiss franc and the Brazilian
real would be a cross rate
The trade between the dollar and yen is very sensitive politically, because the
exchange rate is often a function of trade negotiations between Japan and the
United States
o The Japanese yen is an important currency in Asia because its value
reflects the competitive positions of other countries in the region and
because it is freely traded---unlike the Chinese yuan, which is more tightly
controlled by the government but is moving to become more of a regional
and eventually a global currency
o The yen is also affected by what is called carry trade
o With interest rates being so low in Japan, investors will borrow in yen and
invest the proceeds in other countries such as Brazil
o However, the slightest concern over a risky global economic environment,
the investors will liquidate their investments in Brazil and "carry" the
proceeds back to Japan
o This also occurs at the end of the fiscal year in Japan (March 31) when
companies may need Japanese yen
o Other carry trades often followed by the markets are the United States
dollar against the South African rand and the Hong Kong dollar, the
Australian dollar against the Japanese yen, and the New Zealand dollar
against the Japanese yen
The U.S. dollar is involved in 84.9 percent of all worldwide foreign-exchange
transactions
o Because it's so readily available, it's a popular choice for exchanges
between two countries other than the United States, and it's involved in
four of the seven most traded currency pairs ($/€ is number one, the $ is
number two)
The Euro
The Euro is also in four of the top 10 currency pairs
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