Foreign Exchange

1
Foreign Exchange

• What is the foreign exchange rate?
• What is the foreign exchange market?
• What is the foreign exchange organization?
• Who are the participants?
• - importers/exporters, investors, tourists,
  banks, dealers, brokers, speculators
• Why use the foreign exchange markets?
• - to hedge currency risk, to diversify
  portfolios, to make money

2
Demand for the Dollar ()

• Investment Currency
• Reserve Currency
• Transaction Currency
• Invoice Currency
• Intervention Currency

3
Foreign Exchange Definitions

• Convertibility the degree that one currency can
  be exchanged for another one without difficulty
• Hard Currency is a currency that is convertible
  and is supported by a strong economy
• Spot Rate an exchange rate quoted for immediate
  delivery or within 2 business days
• Forward Rate an exchange rate quoted for today
  that is intended for use in the future. It is a
  verbal agreement or a binding contract

4
Foreign Exchange Definitions Continued

• Value Rate is the date of settlement for the
  foreign exchange transactions
• Bid price the price the dealer is willing to
  buy a currency at
• Offer price/ ask price is the price the dealer
  sells currency for
• Spread is the difference between the buy and
  sell price from the dealers point of view.

5
Foreign Exchange Definitions Continued

• Direct Quote the number of units of a domestic
  currency for one unit of foreign currency
• Indirect Quote the number of units of a foreign
  currency for one unit of a domestic currency
• Spread (forward) is either a discount or a
  premium
• - when the forward rate is higher than the spot
  rate selling at a premium
• - when the forward rate is lower than the spot
  rate selling at a discount

6
Balance of Payments

• B of P is a record of the value of all economic
  transactions between residents of a country
• Consists of the following accounts
• Merchandise Trade Bal.
• Services
• Unilateral Transfers
• Current Accounts