Foreign Exchange - Pennsylvania State University

Foreign Exchange - Pennsylvania State University

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 Demand for the Dollar ($) Investment Currency Reserve Currency

Transaction Currency Invoice Currency Intervention Currency 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 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 dealers point of view.

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

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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