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Foreign Exchange

Foreign Exchange. What is the foreign exchange rate? What is the foreign exchange market? What is the foreign exchange organization? Who are the participants? - importers/exporters, investors, tourists, banks, dealers, brokers, speculators Why use the foreign exchange markets?

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Foreign Exchange

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  1. Foreign Exchange • What is the foreign exchange rate? • What is the foreign exchange market? • What is the foreign exchange organization? • Who are the participants? - importers/exporters, investors, tourists, banks, dealers, brokers, speculators • Why use the foreign exchange markets? - to hedge currency risk, to diversify portfolios, to make money

  2. Demand for the Dollar ($) • Investment Currency • Reserve Currency • Transaction Currency • Invoice Currency • Intervention Currency

  3. Foreign Exchange Definitions • Convertibility – the degree that one currency can be exchanged for another one without difficulty • Hard Currency – is a currency that is convertible and is supported by a strong economy • Spot Rate – an exchange rate quoted for immediate delivery or within 2 business days • Forward Rate – an exchange rate quoted for today that is intended for use in the future. It is a verbal agreement or a binding contract

  4. Foreign Exchange Definitions Continued • Value Rate – is the date of settlement for the foreign exchange transactions • Bid price – the price the dealer is willing to buy a currency at • Offer price/ ask price – is the price the dealer sells currency for • Spread – is the difference between the buy and sell price from the dealer’s point of view.

  5. Foreign Exchange Definitions Continued • Direct Quote – the number of units of a domestic currency for one unit of foreign currency • Indirect Quote – the number of units of a foreign currency for one unit of a domestic currency • Spread (forward) – is either a discount or a premium - when the forward rate is higher than the spot rate selling at a premium - when the forward rate is lower than the spot rate selling at a discount

  6. Balance of Payments • B of P – is a record of the value of all economic transactions between residents of a country Consists of the following accounts: Merchandise Trade Bal. Services Unilateral Transfers + Current Accounts

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