Documente Academic
Documente Profesional
Documente Cultură
Business
Lecture No,41
By
Dr.Shahzad Ansar
Definitions
Foreign Exchange Market:
A market for converting the currency of
one country into the currency of another.
Exchange Rate:
The rate at which one currency is
converted into another.
OBJECTIVES
To learn the fundamentals of foreign
exchange
To identify the major characteristics of the
foreign-exchange market and how
governments control the flow of
currencies across national borders
To understand why companies deal in
foreign exchange
To describe how the foreign-exchange
market works
To examine the different institutions that
deal in foreign exchange
Introduction
Fundamental difference between
payment transactions
Domestic transactionuse only
one currency
Foreign transactionuse two or
more currencies
Foreign exchange money
denominated in the currency of
another group of nations
Foreign-exchange marketmade up
of:
over-the-counter (OTC)
commercial and investment
banks
majority of foreign-exchange
activity
security exchanges
trade certain types of foreignexchange instruments
Exchange rateprice of
currency
Number of units of one
currency that buys one
unit of another
currency
Exchange rate can
change daily
Foreign-Exchange Instruments
Spot transactions exchange rate quoted
for transactions that require either immediate
delivery or delivery within two days
Foreign-Exchange Instruments
FX swapa simultaneous spot and
forward transaction
Currency swapsinvolve interest-bearing
financial instruments
Exchange of principal and interest
payments
Optionsthe right but not the obligation
to trade foreign currency in the future
Futures contractagreement to buy or
sell a currency in the future at a
particular price
1600
1,500
1400
1,190
1200
1000
820
800
600
590
400
200
0
1989
1992
1995
1998
Years
12
$350.90
$451.20
$78.60
$81.70
$139
$94.30
$148.60
$637.30
United States
Hong Kong
Switzerland
Germany
Japan
United Kingdom
Singapore
Others
13
Options
Optionthe right but not the obligation to trade a
foreign currency at a specific exchange rate
Can be purchased OTC or from an exchange
Forward contract is cheaper but less flexible
than an option
Futures
Futures contractspecifies in advance the
exchange rate to be used in exchanging
currency
Tailored to the amount and time frame
needed
Not as flexible as a forward contract
and, therefore, is less valuable
Foreign-Exchange Convertibility
Fully convertible currenciesgovernment
permits both residents and nonresidents
to purchase in unlimited amounts
Hard currencycurrencies that are fully
convertible
Relatively stable and strong
Soft currenciescurrencies that are not
fully convertible
Typically currencies of developing
countries
Nonresident convertibilityforeigners can
Governmental Restrictions on
Foreign-Exchange Convertibility
Restrictions used to conserve scarce foreign
exchange
Licensinggovernment regulates all
foreign-exchange transactions
those who receive foreign currency
required to sell it to its central bank at the
official buying rate
central bank rations foreign currency
Multiple exchange-rate systemdifferent
exchange rates set for different transactions
Governmental Restrictions on
Foreign-Exchange Convertibility
Advance import depositrequires importers
to make a deposit with central bank
covering price of goods they would
purchase from abroad
Quantity controlslimit the amount of
currency that resident can purchase for
foreign travel
Currency controls increase the cost of
international business and reduce overall
international trade