Chapter 6
The Foreign Exchange Market
Questions
1. Definitions. Define the following terms:
a. Foreign exchange market: The foreign exchange market provides the physical and institutional structure through which the money of one country is exchanged for that of another country, the rate of exchange between currencies is determined, and foreign exchange transactions are physically completed.
b. Foreign exchange transaction: A foreign exchange transaction is an agreement between a buyer and ller that a fixed amount of one currency will be delivered for some other currency at a specified rate.
c. Foreign exchange刺河豚: Foreign exchange means the money of a foreign country; that is, foreign currency bank balances, bank notes, checks, and drafts.
2. Functions of the Foreign Exchange Market. What are the three major functions of the foreign exchange market?
a. To transfer purchasing power from one country and its currency to another. Typical parties would be importers and exporters, investors in foreign curities, and tourists.
b. To finance goods in transit. Typical parties would be importers and exporters.
c. To provide hedging facilities. Typical parties would be importers, exporters, and creditors
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and debtors with short-term monetary obligations.
3. Market Participants. For each of the foreign exchange market participants identify their motive
for buying or lling foreign exchange.
a. Foreign exchange dealers are banks and a few nonbank institutions that “make a ma
rket”
in foreign exchange. They buy and ll foreign exchange in the wholesale market and rell
存现句or rebuy it from customers at a slight change from the wholesale price.
b. Individuals and firms conducting international business consist primarily of three categories: importers and exporters, companies making direct foreign investments, and curities investors buying or lling debt or equity investments for their portfolios.
c. Speculators and arbitragers ek to profit from trading in the market itlf. They operate in their own interest, without a need or obligation to rve clients or to ensure a continuous market. Speculators ek all of their profit from exchange rate changes while arbitragers try to profit from simultaneous exchange rate differences in different markets.
d. Central banks and treasuries buy and ll foreign exchange for veral purpos, but most importantly, for intervention in the marketplace. Direct intervention, in which the cent
ral bank will buy (ll) its own currency in the market with its foreign exchange rerves to push its value up (down), is a very common activity by government treasuries and central banking authorities.
e. Foreign exchange brokers (not to be confud with dealers) act as intermediaries in bringing dealers together, either becau the dealers do not want their identities revealed until after the transaction or becau the dealers find that brokers “shop the market,” that is, scan the bid and
offer prices of many dealers very quickly. They charge a small commission for this rvice and do not become principals in the transactions.
4. Transaction. Define each of the following types of foreign exchange transactions:
a. Spot: A spot transaction is an agreement between two parties to exchange one currency for another, with the transaction being carried out at once for commercial customers and on the cond following business day for most interbank (i.e., wholesale) trades.
b. Outright forward: A forward transaction is an agreement made today to exchange one currency for another, with the date of the exchange being a specified time in the future—often one month, two months, or some other definitive calendar interval. The rate at which the two currencies will be exchanged is t today.
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难忘初心c. Forward-forward swaps: A forward-forward swap is a sophisticated swap transaction. For example,英格兰牧羊犬>即又造句 assume a dealer lls £20,000,000 forward for dollars for delivery in, say, two months at $1.6870/£ and simultaneously buys £20,000,000 forward for delivery in three months at $1.6820/£. The difference between the buying price and the lling price is equivalent to the interest rate differential, that is, interest rate parity, between the two currencies. Thus, a swap can be viewed as a technique知止是什么意思 for borrowing another currency on a fully collateralized basis.
