Professional Documents
Culture Documents
International Financial Markets
International Financial Markets
International Financial Markets
Foreign Exchange Market Eurocurrency market Eurocredit Market Eurobond Market International Stock Markets Foreign Exchange Market. The foreign exchange market allows currencies to be exchanged in order to facilitate international trade or financial transactions.
Forward Contracts
There are also forward contracts available which allow for the purchasing or selling of currencies in future periods. Within the forward contract, a forward rate is specified. This represents the exchange rate at which currencies will be exchanged at a future point in time.
When MNCs anticipate future need or future receipt of a foreign currency, they can set up forward contracts to lock in the rate at which they can purchase or sell a particular foreign currency. Virtually all MNCs use forward contracts.
Forward Contracts
Premium or Discount on the Forward Rate: If the forward rate exceeds the existing spot rate, it contains a premium. If it is less than the existing spot rate, it contains a discount.
The above premium or discount is normally computed an annual basis. Ex. Rate for British Value Maturity Forward Premium Or Discount Spot rate $1.8632 30-day FR $1.8621 30 days $1.8621 - $1.8632/$1.8632 x 360/30 = -.71% 90-day FR $1.8586 90 day $1.8586 1.8632/$1.8632 x 360/90 = -.99%
A commercial bank quotes a spot rate of $1.90 for the French frank and a 90-day forward rate of $1.88. Determine the forward premium (or discount) of the French frank on an annualized basis.
Forward dis. for the French frank = $1.88 - $1.9/1.9 x 360/90 = -4.21%
Problems
1. The $:DM exchange rate is DM 1 = $0.35, and DM:FF exchange rate is FF 1 = DM 0.31. What is the FF:$ exchange rate? Suppose the direct quote for sterling in New York is 1.1110-5. What is the direct quote for dollars in London? Suppose the spot quote on the Deutsche mark is $0.3302-10, and the spot quote on the FF is $0.1180-90.
2. 3.
a. what is the direct spot quote for the franc In Frankfurt? b. compute the percentage bid-ask spreads on the DM and franc. 4. The spot and 90-day forward rates for the pound are $1.1376 and $1.1350, respectively. What is the forward premium or discount on the pound?
standard volume of a particular currency to be exchanged on a specific settlement date. Futures contracts are somewhat similar to forward contracts , except that they are sold on an exchange while forward contracts are offered by commercial banks.Profit & losses of futures contracts are paid over every day at the end of trading, a practice called marking to market.
Currency futures are currently available for the British pound, Canadian dollar, Deutsche mark, Swiss Frank, French frank, Japanese yen, Australian dollar, and European Currency unit. Contracts sizes are standardized according to amount of foreign currency for example, 62,500, C$100,000, A$100,000, DM125,000, FF250,000, SF125,000
British pound Canadian dollar German mark Japanese yen Swiss franc
Futures
Standardized Standardized Banks, brokers, and MNC. Qualified public speculation encouraged. Small security deposit required. Central exchange floor ww. Daily settlement practiced. Negotiated brokerage fees.
Euromarkets
Eurocurrency Market. A eurocurrency market deals in eurocurrency. A eurocurrency is a dollar or other freely convertible currency deposited in a bank outside its country of origin. The eurocurrency market consists of those banks called Eurobanks that accept deposits and make loans in foreign currencies (I.e., in dollars).
Euromarkets
Eurocredit Market. MNCs have access to mediumterm funds through Eurobanks located in foreign markets, called Eurocredit market. Loans of one year or longer extended by Eurobanks are commonly called Eurocredits or Eurocredit loans. Eurobond Market. The Eurobond market facilitates the international transfers of long-term credit in the form of Eurobonds, which enables government and large corporations to borrow funds from various countries.
Bid/Ask Spread