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and International
Financial
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Markets
chapter 8
Chapter Objectives
Describe how demand and supply
determine the price of foreign exchange
Discuss the role of international banks in
the foreign-exchange market
Assess the different ways firms can use
the spot and forward markets to settle
international transactions
8-2
8-3
Foreign Exchange
Foreign exchange is a commodity
that consists of currencies issued by
countries other than ones own.
8-4
Demand for
Japanese yen is
derived from
foreigners demand
for Japanese
products
8-5
Supply for
Japanese yen is
derived from
Japanese
demand for
foreign products
8-6
8-7
Foreign-Exchange Rates
Direct exchange rate
Direct quote
Price of the foreign currency in terms of home
currency
8-8
8-9
8-10
Foreign-Exchange Trading
The largest center for foreign
exchange trading is London, followed
by New York and Tokyo.
8-11
8-12
8-13
8-14
Commercial customers
Speculators
Arbitrageurs
8-15
Foreign-Exchange Trading
The Tel Aviv
foreignexchange
trader is an
important link
in the $3.2
trillion-per-day
global
exchange
market.
8-16
8-17
8-18
8-19
Arbitrage
Arbitrage is the riskless purchase of
a product in one market for
immediate resale in a second market
in order to profit from a price
discrepancy. There are two types of
arbitrage activities that affect the
foreign-exchange market: arbitrage
of goods and arbitrage of money.
8-20
Arbitrage
Arbitrage
of Goods
8-21
Arbitrage
of Money
Arbitrage of Money
Two-point
Three-point
8-22
Covered-interest
Figure 8.6
Three-Point Arbitrage
8-23
8-24
BNP Paribas
Fortis
Credit Agricole
Citigroup
Deutsche Bank
Dexia Group
Bank of America
Corp.
HSBC Holding
HBOS
8-25
Establishment of Overseas
Banking Operations
Subsidiary bank
Branch bank
8-26
Affiliated bank
8-29
8-30
8-31