Exchange Rates and International Transactions Interbank trading Foreign currency trading among banks It accounts for most of the activity in the foreign exchange market Copyright C 2003 Pearson Education, Inc Slide 13-11
Copyright © 2003 Pearson Education, Inc. Slide 13-11 • Interbank trading – Foreign currency trading among banks – It accounts for most of the activity in the foreign exchange market. Exchange Rates and International Transactions
Exchange Rates and International Transactions Characteristics of the market The world wide volume of foreign exchange trading is enormous, and it has ballooned in recent years New technologies, such as Internet links, are used among the major foreign exchange trading centers (London, New York, Tokyo, Frankfurt, and Singapore The integration of financial centers implies that there can be no significant arbitrage The process of buying a currency cheap and selling it dear Copyright C 2003 Pearson Education, Inc Slide 13-12
Copyright © 2003 Pearson Education, Inc. Slide 13-12 ▪ Characteristics of the Market • The worldwide volume of foreign exchange trading is enormous, and it has ballooned in recent years. • New technologies, such as Internet links, are used among the major foreign exchange trading centers (London, New York, Tokyo, Frankfurt, and Singapore). • The integration of financial centers implies that there can be no significant arbitrage. – The process of buying a currency cheap and selling it dear. Exchange Rates and International Transactions
Exchange Rates and International Transactions ° Vehicle currency a currency that is widely used to denominate international contracts made by parties who do not reside in the country that issues the vehicle currency Example: In 2001, around 90% of transactions between banks involved exchanges of foreign currencies for U.S. dollars Copyright C 2003 Pearson Education, Inc Slide 13-13
Copyright © 2003 Pearson Education, Inc. Slide 13-13 • Vehicle currency – A currency that is widely used to denominate international contracts made by parties who do not reside in the country that issues the vehicle currency. – Example: In 2001, around 90% of transactions between banks involved exchanges of foreign currencies for U.S. dollars. Exchange Rates and International Transactions
Exchange Rates and International Transactions Spot rates and Forward rates ° Spot exchange rates pply to exchange currencies on the spot A Forward exchange rates Apply to exchange currencies on some future date at a prenegotiated exchange rate Forward and spot exchange rates, while not necessarily equal, do move closely together Copyright C 2003 Pearson Education, Inc Slide 13-14
Copyright © 2003 Pearson Education, Inc. Slide 13-14 ▪ Spot Rates and Forward Rates • Spot exchange rates – Apply to exchange currencies “on the spot” • Forward exchange rates – Apply to exchange currencies on some future date at a prenegotiated exchange rate • Forward and spot exchange rates, while not necessarily equal, do move closely together. Exchange Rates and International Transactions