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    Slide CH 7 Multinational Financial Management

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    ariftanur
    This document provides an overview of Chapter 7 from the textbook "Multinational Financial Management" by Alan Shapiro. It discusses the foreign exchange market, including the spot and forward markets. The key points covered are: - The foreign exchange market facilitates international trade and capital transactions by allowing currency to be exchanged. Major participants include banks, brokers, and commercial customers. - The spot market involves immediate currency exchange while the forward market sets exchange rates for trades at a future date. Major currency trading centers include London, New York, Zurich, and Tokyo. - The document defines forward contracts and explains that they are used by businesses to hedge against exchange rate risk over a specified future period. Calculations of forward

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    © All Rights Reserved
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    Slide CH 7 Multinational Financial Management

    Uploaded by

    ariftanur
    311 views33 pages
    This document provides an overview of Chapter 7 from the textbook "Multinational Financial Management" by Alan Shapiro. It discusses the foreign exchange market, including the spot and forward markets. The key points covered are: - The foreign exchange market facilitates international trade and capital transactions by allowing currency to be exchanged. Major participants include banks, brokers, and commercial customers. - The spot market involves immediate currency exchange while the forward market sets exchange rates for trades at a future date. Major currency trading centers include London, New York, Zurich, and Tokyo. - The document defines forward contracts and explains that they are used by businesses to hedge against exchange rate risk over a specified future period. Calculations of forward

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    Slide Ch 7 Multinational Financial Management by Alan C. Shapiro

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    Slide Ch 7 Multinational Financial Management

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    This document provides an overview of Chapter 7 from the textbook "Multinational Financial Management" by Alan Shapiro. It discusses the foreign exchange market, including the spot and forward markets. The key points covered are: - The foreign exchange market facilitates international trade and capital transactions by allowing currency to be exchanged. Major participants include banks, brokers, and commercial customers. - The spot market involves immediate currency exchange while the forward market sets exchange rates for trades at a future date. Major currency trading centers include London, New York, Zurich, and Tokyo. - The document defines forward contracts and explains that they are used by businesses to hedge against exchange rate risk over a specified future period. Calculations of forward

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    311 views33 pages

    Slide CH 7 Multinational Financial Management

    Uploaded by

    ariftanur
    This document provides an overview of Chapter 7 from the textbook "Multinational Financial Management" by Alan Shapiro. It discusses the foreign exchange market, including the spot and forward markets. The key points covered are: - The foreign exchange market facilitates international trade and capital transactions by allowing currency to be exchanged. Major participants include banks, brokers, and commercial customers. - The spot market involves immediate currency exchange while the forward market sets exchange rates for trades at a future date. Major currency trading centers include London, New York, Zurich, and Tokyo. - The document defines forward contracts and explains that they are used by businesses to hedge against exchange rate risk over a specified future period. Calculations of forward

    Copyright:

    © All Rights Reserved
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    Download as ppt, pdf, or txt
    of 33

    Multinational Financial

    Management
    Alan Shapiro
    9th Edition
    J.Wiley & Sons

    Power Points by
    Joseph F. Greco, Ph.D.
    California State University, Fullerton

    CHAPTER 7
    The Foreign Exchange
    Market

    INTRODUCTION
    I. INTRODUCTION
    A. The Currency Market
    Definition: a place where money denominated in
    one currency is bought and sold with money
    denominated in another currency

    INTRODUCTION
    B. International Trade and Capital
    Transactions:
    facilitated with the ability to transfer
    purchasing power between countries

    INTRODUCTION
    C. Location
    1.
    OTC-type: no specific
    location
    2.
    Most trades by phone,
    telex, or SWIFT
    SWIFT: Society for Worldwide Interbank Financial
    Telecommunications

    ORGANIZATION OF THE FOREIGN


    EXCHANGE MARKET
    I. PARTICIPANTS IN THE FOREIGN EXCHANGE
    MARKET
    A. Participants at 2 Levels
    1. Wholesale Level (95%)
    - major banks
    2. Retail Level
    - business customers

    ORGANIZATION OF THE FOREIGN


    EXCHANGE MARKET
    B.Two Types of Currency Markets
    1.

    Spot Market:
    - immediate transaction
    - recorded by 2nd business day

    ORGANIZATION OF THE FOREIGN


    EXCHANGE MARKET
    2. Forward Market:
    - transactions take place at a
    specified future date

    ORGANIZATION OF THE FOREIGN


    EXCHANGE MARKET
    C. Participants by Market
    1.

    Spot Market
    a. commercial banks
    b. brokers
    c. customers of commercial and central banks

    ORGANIZATION OF THE FOREIGN


    EXCHANGE MARKET
    2. Forward Market
    a. arbitrageurs

    b. traders
    c. hedgers
    d. speculators

    10

    ORGANIZATION OF THE FOREIGN


    EXCHANGE MARKET
    II. CLEARING SYSTEMS
    A. Clearing House Interbank Payments System
    (CHIPS)

    11

    used in U.S. for electronic fund transfers.

    ORGANIZATION OF THE FOREIGN


    EXCHANGE MARKET
    B. FedWire
    - operated by the Fed
    - used for domestic transfers

    12

    ORGANIZATION OF THE FOREIGN


    EXCHANGE MARKET
    III. ELECTRONIC TRADING
    A. Automated Trading

    - genuine screen-based market

    13

    ORGANIZATION OF THE FOREIGN


    EXCHANGE MARKET
    B. Results:
    1. Reduces cost of trading

    2. Threatens traders oligopoly of information


    3. Provides liquidity

    14

    ORGANIZATION OF THE FOREIGN


    EXCHANGE MARKET
    IV. SIZE OF THE MARKET
    A. Largest financial market in the world

    2007:

    US$3.2 trillion daily


    or
    US$800 trillion a year

    15

    ORGANIZATION OF THE FOREIGN


    EXCHANGE MARKET
    B. Market Centers by Size (2007):
    -daily turnover:
    #1: London = $1.359 trillion
    #2: New York= $664 billion

    #3: Zurich=$242 billion


    #4: Tokyo = $238billion

    16

    THE SPOT MARKET


    I. SPOT QUOTATIONS
    A. Sources
    1. All major newspapers
    2. Major currencies have four different quotes:
    a. spot price
    b. 30-day
    c. 90-day
    d. 180-day

    17

    THE SPOT MARKET


    B. Method of Quotation
    1. For inter-bank dollar trades:
    a. American terms
    example: $1.21/

    b. European terms
    example: Peso1.713/$
    18

    THE SPOT MARKET


    2. For non-bank customers:
    Direct quote gives the home currency price

    (always in the numerator) of one unit of foreign


    currency.
    EXAMPLE:

    $1.81/

    Since this is a direct quote, we know that in


    the U.S., one pound transacted at $1.81

    19

    THE SPOT MARKET


    C. Transactions Costs
    1. Bid-Ask Spread
    used to calculate the fee charged by the bank
    Bid = the price at which the bank is willing to
    buy
    Ask = the price it will sell the currency

    20

    THE SPOT MARKET


    Percent Spread Formula (PS):

    Ask Bid
    PS
    x100
    Ask
    21

    THE SPOT MARKET


    D. Cross Rates
    1. The exchange rate between 2 non - US$

    currencies

    22

    THE SPOT MARKET


    D. Cross Rates (cont)
    2. Calculating Cross Rates (example)
    Suppose you want to calculate the / cross
    rate.
    You know .5556/US$ and .8334/US$
    then
    / = .5556/US$ .8334/US$

    23

    = .6667/

    THE SPOT MARKET


    E. Currency Arbitrage
    1. If cross rates differ from one financial center to
    another, and profit opportunities exist.

    2. Buy cheap in one intl market,sell at a higher


    price in another
    3. The Critical Role of Available Information

    24

    THE SPOT MARKET


    F. Settlement Date Value Date:
    1. Date monies are due
    2. 2nd Working day after date of original
    transaction.

    25

    THE SPOT MARKET


    G. Exchange Risk
    1. Bankers = middlemen

    a. Incurring risk of adverse exchange rate moves.


    b. Increased uncertainty about future exchange
    rate requires
    1.) Demand for higher risk premium
    2.) Bankers widen bid-ask spread

    26

    MECHANICS OF SPOT
    TRANSACTIONS
    H. SPOT TRANSACTIONS: Example
    Step 1. Currency transaction:
    verbal agreement, U.S. importer
    specifies:
    a. Account to debit (his acct)
    b. Account to credit (exporter)

    27

    MECHANICS OF SPOT
    TRANSACTIONS
    Step 2.

    Bank sends importer


    contract note including:
    - amount of foreign
    currency
    - agreed exchange rate

    - confirmation of Step 1.

    28

    MECHANICS OF SPOT
    TRANSACTIONS
    Step 3.

    Settlement
    Correspondent bank in Hong Kong
    transfers HK$ from nostro account to
    exporters.

    Value Date.
    U.S. bank debits importers account.

    29

    THE FORWARD MARKET


    I. INTRODUCTION
    A. 3 Part Definition of a Forward Contract:
    an agreement between a bank and a customer to
    deliver a
    specified amount of currency against
    another currency
    at a specified future date and
    at a fixed exchange rate

    30

    THE FORWARD MARKET


    B. Purpose of a Forward:

    Hedging
    the act of reducing exchange
    rate risk.

    31

    THE FORWARD MARKET


    C. Forward Rate Quotations
    1. Two Methods:
    a. Outright Rate: quoted to commercial
    customers
    b. Swap Rate: quoted in the inter-bank
    market as a discount or premium

    32

    THE FORWARD MARKET


    CALCULATING THE FORWARD PREMIUM
    OR DISCOUNT

    = F-S x 12 x 100
    S
    n
    where

    33

    F=
    S=
    n=

    the forward rate of exchange


    the spot rate of exchange
    the number of months in the
    forward contract

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