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  3. Lecture International finance: An analytical approach (3/e): Chapter 2 - Imad A. Moosa

Lecture International finance: An analytical approach (3/e): Chapter 2 - Imad A. Moosa

Chapter 2 - The foreign exchange market. After reading the material in this chapter, you should be able: To describe the basic features of the foreign exchange market, to identify market participants and traded currencies, to describe the australian foreign exchange market, to describe the mechanics and technology of foreign exchange trading, to introduce some exchange rate concepts, to illustrate foreign exchange position keeping, to introduce some foreign exchange jargon. Chapter 2 The Foreign

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  1. Chapter 2 The Foreign Exchange Market
  2. Objectives • To describe the FX market • To identify participants and currencies • To describe the Australian FX market • To describe the mechanics and technology of FX trading (cont.) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-2
  3. Objectives (cont.) • To introduce some exchange rate concepts • To illustrate FX position keeping • To introduce some FX jargon Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-3
  4. Definition • The FX market is the market where national currencies are bought and sold against one another. Foreign exchange consists mainly of bank deposits. Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-4
  5. Characteristics • It is the largest and most perfect market • It is needed because every international transaction requires a foreign exchange transaction • It is an over-the-counter (OTC) market Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-5
  6. Market participants • Foreign exchange traders buy and sell currencies directly or indirectly • Arbitragers exploit exchange rate anomalies; hedgers cover open positions; speculators take open positions Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-6
  7. Categories of participants • Customers • Commercial banks • Other financial institutions • Brokers • Central banks Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-7
  8. Interbank operations • The FX market is dominated by interbank operations • Participants in the interbank market are market makers, other major dealers and second-tier banks Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-8
  9. Size and composition • The size of the global FX market is measured by the sum of daily turnover in FX centres • A survey is coordinated by the BIS every three years for this purpose Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-9
  10. Daily turnover in the FX market (USD billion) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-10
  11. Geographical distribution of FX market turnover (%) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-11
  12. FX market turnover by counterparty (institutional type) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-12
  13. FX market turnover by counterparty (locality) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-13
  14. Currency composition of the FX market (by single currencies) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-14
  15. Currency composition of the FX market (by currency pairs) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-15
  16. Traded currencies • The US dollar is the most heavily traded currency • The euro and the yen are heavily traded because of the importance of Europe and Japan in the world economy (cont.) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-16
  17. Traded currencies (cont.) • The pound is heavily traded for historical reasons • Currencies that are heavily traded in certain financial centres and lack liquidity in others: CHF, CAD (cont.) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-17
  18. Traded currencies (cont.) • Currencies that are traded locally, but internationally are traded for international trade purposes: AUD, NZD, HKD • Third world currencies: soft or exotic currencies Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-18
  19. The AUD FX market • The market consists of the banking system and non-bank dealers authorised by the Reserve Bank of Australia (RBA) • The market has grown since the flotation of the AUD in 1983 Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-19
  20. Daily turnover in the Australian FX market (USD billion) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 2-20
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