CHAPTER 5 THE MARKET FOR FOREIGN EXCHANGE
SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER
QUESTIONS AND PROBLEMS
QUESTIONS
北京日语培训1. Give a full definition of the market for foreign exchange.
Answer: Broadly defined, the foreign exchange (FX) market encompass the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, and trading in foreign currency options and futures contracts.
bossanova2. What is the difference between the retail or client market and the wholesale or interbank market for foreign exchange?vent
Answer: The market for foreign exchange can be viewed as a two-tier market. One tier is t
he wholesalegrumman or interbank market and the other tier is the retail or client market. International banks provide the core of the FX market. They stand willing to buy or ll foreign currency for their own account. The international banks rve their retail clients, corporations or individuals, in conducting foreign commerce or making international investment in financial asts that requires foreign exchange. Retail transactions account for only about 14 percent of FX trades. The other 86 percent is interbank trades between international banks, or non-bank dealers large enough to transact in the interbank market.
3. Who are the market participants in the foreign exchange market?
麻木的英文Answer: The market participants that compri the FX market can be categorized into five groups: international banks, bank customers, non-bank dealers, FX brokers, and central banks. International banksregards provide the core of the FX market. Approximately 100 to 200 banks worldwide make a market in foreign exchange, i.e., they stand willing to buy or ll foreign currency for their own account. The international banks rve their retail
clients, the bank customers, in conducting foreign commerce or making international investment in financial asts that requires foreign exchange. Non-bank dealers are large non-bank financial institutions, such as investment banks, mutual funds, pension funds, and hedge funds, who size and frequency of trades make it cost- effective to establish their own dealing rooms to trade directly in the interbank market for their foreign exchange needs.
Most interbank trades are speculative or arbitrage transactions where market participants attempt to correctly judge the future direction of price movements in one currency versus another or attempt to profit from temporary price discrepancies in currencies between competing dealers.
FX brokers match dealer orders to buy and ll currencies for a fee, but do not take a position themlves. Interbank traders u a broker primarily to disminate as quickly as possible a currency quote to many other dealers.rectangle什么意思
Central banks sometimes intervene in the foreign exchange market in an attempt to influe
nce the price of its currency against that of a major trading partner, or a country that it “fixes” or “pegs” its currency against. Intervention is the process of using foreign currency rerves to buy one’s own currency in order to decrea its supply and thus increa its value in the foreign exchange market, or alternatively, lling one’s own currency for foreign currency in order to increa its supply and lower its price.
4. How are foreign exchange transactions between international banks ttled?
Answer: The interbank market is a network of correspondent banking relationships, with large commercial banks maintaining demand deposit accounts with one another, called correspondent bank accounts. The correspondent bank account network allows for the efficient functioning of the foreign exchange market. As an example of how the network of correspondent bank accounts facilities international foreign exchange transactions, consider a U.S. importer desiring to purcha merchandi invoiced in guilders from a Dutch exporter. The U.S. importer will contact his bank and inquire about the exchange rate. If the U.S. importer accepts the offered exchange rate, the bank will debit the U.S. i
mporter’s account for the purcha of the Dutch guilders. The bank will instruct its correspondent bank in the Netherlands to debit its correspondent bank account the appropriate amount of guilders and to credit the Dutch exporter’s bank account. The importer’s bank will then debit its books to offt the debit of U.S. importer’s account, reflecting the decrea in its correspondent bank account balance.
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5. What is meant by a currency trading at a discount or at a premium in the forward market?
Answer: The forward market involves contracting today for the future purcha or sale of foreign exchange. The forward price may be the same as the spot price, but usually it is higher (at a premium) or lower (at a discount) than the spot price.
6. Why does most interbank currency trading worldwide involve the U.S. dollar?
Answer: Trading in currencies worldwide is against a common currency that has international appeal. That currency has been the U.S. dollar since the end of World War I
bethuneI. However, the euro and Japane yen have started to be ud much more as international currencies in recent years. More importantly, trading would be exceedingly cumbersome and difficult to manage if each trader made a market against all other currencies.
