Chapter 10 - The foreign exchange market. In this chapter, students will be able to understand: Describe the functions of the foreign exchange market. Understand what is meant by spot exchange rates. Recognize the role that forward exchange rates play in insuring against foreign exchange risk,. | Global Business Today 8e by Charles . Hill Chapter 10 The Foreign Exchange Market Introduction Question: What is the foreign exchange market? The foreign exchange market is a market for converting the currency of one country into that of another country Question: What is the exchange rate? The exchange rate is the rate at which one currency is converted into another Functions of the FX Market Question: What is the purpose of the foreign exchange market? The foreign exchange market: Enables the conversion of the currency of one country into the currency of another Provides some insurance against foreign exchange risk - the adverse consequences of unpredictable changes in exchange rates Functions of the FX Market Spot exchange rate - the rate at which a foreign exchange dealer converts one currency into another currency on a particular day Forward exchange rate - the exchange rate governing a transaction in which two parties agree to exchange currency and execute the deal at some specific date in the future Currency swap - the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates Nature of the FX Market The foreign exchange market is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems The market is always open somewhere in the world If exchange rates quoted in different markets were not essentially the same, there would be an opportunity for arbitrage - the process of buying a currency low and selling it high Most transactions involve . dollars on one side The . dollar is a vehicle currency Theories of Exchange Rate Determination Question: What factors are important to future exchange rates? Three factors that have an important impact on future exchange rate movements are: A country’s price inflation A country’s interest rate Market psychology Theories of Exchange Rate Determination Question: How are prices related to exchange rate movements? To . | Global Business Today 8e by Charles . Hill Chapter 10 The Foreign Exchange Market Introduction Question: What is the foreign exchange market? The foreign exchange market is a market for converting the currency of one country into that of another country Question: What is the exchange rate? The exchange rate is the rate at which one currency is converted into another Functions of the FX Market Question: What is the purpose of the foreign exchange market? The foreign exchange market: Enables the conversion of the currency of one country into the currency of another Provides some insurance against foreign exchange risk - the adverse consequences of unpredictable changes in exchange rates Functions of the FX Market Spot exchange rate - the rate at which a foreign exchange dealer converts one currency into another currency on a particular day Forward exchange rate - the exchange rate governing a transaction in which two parties agree to exchange currency and execute the deal at some .
