Chapter 17
The purpose of this chapter is to present the foreign exchange market and exchange rates, with an emphasis on spot exchange rates. Foreign exchange is the act of trading different countries' moneys. An exchange rate is the price of one money in terms of another. The spot exchange rate is the price for "immediate" exchange. The forward exchange rate is the price agreed to today for exchanges that will take place in the future.
Knowledge Points
The purpose of this chapter is to present the foreign exchange market and exchange rates, with an emphasis on spot exchange rates. Foreign exchange is the act of trading different countries' moneys. An exchange rate is the price of one money in terms of another. The spot exchange rate is the price for "immediate" exchange.
We can picture the foreign exchange market by using demand and supply curves. Exports of goods and services and capital outflows (as well as income payments to foreigners) create a demand for foreign currency, as payments for these items typically require that at some point in the payment process the home currency is exchanged for the foreign currency to pay for the items that the home residents are buying.
The chapter concludes by introducing the two different kinds of arbitrage that can occur using the spot foreign exchange market. The simpler form is arbitrage of the same exchange rate between two locations. This arbitrage assures that, at a particular time, the same exchange rate is essentially the same value in different locations (at least within a small range that reflects transactions costs).
The purpose of this chapter is to present the foreign exchange market and exchange rates, with an emphasis on spot exchange rates. Foreign exchange is the act of trading different countries' moneys. An exchange rate is the price of one money in terms of another. The spot exchange rate is the price for "immediate" exchange.
At the center of the foreign exchange market are a group of banks that use computers and telecommunications to conduct trades with their customers (the retail part of the market) and with each other (the interbank part of the market). Most foreign exchange trades are conducted by exchanging ownership of demand deposits denominated in different currencies.
The purpose of this chapter is to present the foreign exchange market and exchange rates, with an emphasis on spot exchange rates. Foreign exchange is the act of trading different countries' moneys. An exchange rate is the price of one money in terms of another. The spot exchange rate is the price for "immediate" exchange.
The purpose of this chapter is to present the foreign exchange market and exchange rates, with an emphasis on spot exchange rates. Foreign exchange is the act of trading different countries' moneys. An exchange rate is the price of one money in terms of another. The spot exchange rate is the price for "immediate" exchange.
Cases
4.The U.S. firm obtains a quotation from its bank on the spot exchange rate for buying yen with dollars. If the rate is acceptable, the firm instructs its bank that it wants to use dollars from its dollar checking account to buy 1 million yen at this spot exchange rate. It also instructs its bank to send the yen to the bank account of the Japanese firm.
4.The U.S. firm obtains a quotation from its bank on the spot exchange rate for buying yen with dollars. If the rate is acceptable, the firm instructs its bank that it wants to use dollars from its dollar checking account to buy 1 million yen at this spot exchange rate. It also instructs its bank to send the yen to the bank account of the Japanese firm. To carry out this instruction, the U.S. bank instructs its correspondent bank in Japan to take 1 million yen from its account at the correspondent bank and transfer the yen to the bank account of the Japanese firm. (The U.S. bank could also use yen at its own branch if it has a branch in Japan.)
The text explains the downward slope of the demand curve for foreign currency through changes in the dollar price of products that the home country might buy from the foreign country, as the going spot exchange rate would be one or another value. (The text assumes that the supply curve slopes upward, without much discussion at this point.
The text explains the downward slope of the demand curve for foreign currency through changes in the dollar price of products that the home country might buy from the foreign country, as the going spot exchange rate would be one or another value. (The text assumes that the supply curve slopes upward, without much discussion at this point. The details of how values of exports and imports respond to changes in the exchange rate are deferred until the last part of Chapter 23.)
Suggested answers to case study discussion question Foreign Exchange Trading: In Europe there is one major location for foreign exchange trading, London. In North America (really, the Americas, or the Western Hemisphere) there is one major location, New York. Asia is different, it has three locations that are all about equal in size—Tokyo (Japan), Singapore, and Hong Kong.
Suggested answers to case study discussion question Foreign Exchange Trading: In Europe there is one major location for foreign exchange trading, London. In North America (really, the Americas, or the Western Hemisphere) there is one major location, New York. Asia is different, it has three locations that are all about equal in size—Tokyo (Japan), Singapore, and Hong Kong. Foreign exchange trading is a business that seems to benefit from external scale economies (discussed in Chapter 6), as shown by the clustering of trading in banks in each of London and New York. London dominates foreign exchange trading in Europe, with its time zones of overlapping banking hours, and New York dominates foreign exchange trading in the Western Hemisphere, with its time zones of overlapping banking hours. Because external scale economies seem to be important in this industry, it is surprising that no one
b.Demand for yen. The U.S. import company probably begins with dollars, and the Japanese producer probably wants to receive payments in yen. Dollars must be sold to obtain yen.
b.Demand for yen. The U.S. import company probably begins with dollars, and the Japanese producer probably wants to receive payments in yen. Dollars must be sold to obtain yen.
Exercises
Which of the following refers to foreign exchange?
正确答案：A | The act of trading different nations' moneys
难度：1 Easy Bloom's：Remember
If the price of British pounds in terms of U.S. dollars is $1.80 per pound, then the price of U.S. dollars in terms of British pounds is
正确答案：B | £0.556 per dollar.
难度：1 Easy Bloom's：Remember
The exchange rate set for an immediate trade is often referred to as a
正确答案：D | spot exchange rate.
难度：1 Easy Bloom's：Remember
The exchange rate that is set now for a currency trade that will take place sometime more than a few days in the future is often referred to as a
正确答案：B | forward exchange rate.
难度：1 Easy Bloom's：Remember
The retail part of the foreign exchange market does not include traders at banks trading with
正确答案：C | traders at other banks.
难度：1 Easy Bloom's：Remember
Which of the following is true of foreign exchange markets?
正确答案：D | Most foreign exchange trading involves the exchange of U.S. dollars for other currencies.
难度：2 Medium Bloom's：Understand
The U.S. dollar is called a ________ because it is often used as an intermediary to accomplish trading between two other currencies.
正确答案：A | vehicle currency
难度：1 Easy Bloom's：Remember
Suppose the dollar per pound exchange rate is $2 per pound while the dollar per Swiss franc exchange rate is 50 cents per franc. From the given information we can conclude that the Swiss franc per pound exchange rate is
正确答案：D | 4 francs per pound.
难度：2 Medium Bloom's：Understand
Which of the following is NOT a function of the interbank part of the foreign exchange market?
正确答案：D | Provides clearing services for organizations that prefer to use different currencies
难度：2 Medium Bloom's：Understand
The 2004-2013 rapid growth in global foreign exchange trading can be explained by
正确答案：A | large increases in trading by hedge funds, pension funds, and other financial institutions.
难度：1 Easy Bloom's：Remember
Interbank trading is conducted directly between ________ or through the use of ________ that provide anonymity until the trade is complete.
正确答案：A | traders; brokers
难度：1 Easy Bloom's：Remember
A country's demand for foreign currency is derived from
正确答案：A | international transactions entering the debit side of its balance-of-payments accounts.
难度：1 Easy Bloom's：Remember
Manual Preview
The purpose of this chapter is to present the foreign exchange market and exchange rates, with an emphasis on spot exchange rates. Foreign exchange is the act of trading different countries' moneys. An exchange rate is the price of one money in terms of another. The spot exchange rate is the price for "immediate" exchange. The forward exchange rate is the price agreed to today for exchanges that will take place in the future. An exchange rate is confusing because there is no natural way to quote the price. The currency that is being priced or valued by the rate is the currency that is in the denominator.
At the center of the foreign exchange market are a group of banks that use computers and telecommunications to conduct trades with their customers (the retail part of the market) and with each other (the interbank part of the market). Most foreign exchange trades are conducted by exchanging ownership of demand deposits denominated in different currencies. The box “Foreign Exchange Trading” notes the immense size and some of the characteristics of the foreign exchange market.
We can picture the foreign exchange market by using demand and supply curves. Exports of goods and services and capital outflows (as well as income payments to foreigners) create a demand for foreign currency, as payments for these items typically require that at some point in the payment process the home currency is exchanged for the foreign currency to pay for the items that the home residents are buying. Imports of goods and services and capital inflows (as well as income received from foreign sources) create a supply of foreign currency, as payments for these items typically require that at some point in the payment process the foreign currency is exchanged for the home currency to pay for the items that the foreign residents are buying.
The text explains the downward slope of the demand curve for foreign currency through changes in the dollar price of products that the home country might buy from the foreign country, as the going spot exchange rate would be one or another value. (The text assumes that the supply curve slopes upward, without much discussion at this point. The details of how values of exports and imports respond to changes in the exchange rate are deferred until the last part of Chapter 23.)
Slide Outline
NextLab Bridge