...Foreign Exchange Market FX, forex, or currency market) is a form of exchange for the global decentralized trading of international currencies. Virtual No one central physical location that is the foreign currency market Exists in the dealing rooms of various central banks and large international banks and corporations. The dealing rooms are connected via telephone and computers The foreign exchange market assists international trade and investment by enabling currency conversion. Exchange Rates Trading on the Foreign Exchange Market establishes rates of exchange for currency Exchange rates are constantly fluctuating on the forex market as demand rises and falls for particular currencies, their exchange rates adjust accordingly Instantaneous rate quotes are available from a service provided by Reuters Gold Standards A monetary system in which a country's government allows its currency unit to be freely converted into fixed amounts of gold and vice versa. The exchange rate is determined by the economic difference for an ounce of gold between two currencies It was premised on three basic ideas: A system of fixed rates of exchange existed between participating countries Money issued by member countries had to be backed by gold reserves Gold acted as an automatic adjustment The Fall of Gold Standards With the Great War the gold supply continued to fall behind the growth of the global economy The British pound...
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...Price Discovery in Currency Markets Abstract This paper makes three contributions to our understanding of the price discovery process in currency markets. First, it provides evidence that this process cannot be the familiar one based on adverse selection and customer spreads, since such spreads are inversely related to a trade’s likely information content. Second, the paper suggests three potential sources for the pattern of customer spreads, two of which rely on the information structure of the market. Third, the paper suggests an alternative price discovery process for currencies, centered on inventory management strategies in the interdealer market, and provides preliminary evidence for that process. [JEL F31, G14, G15. Keywords: Bid-ask spreads, foreign exchange, asymmetric information, microstructure, price discovery, interdealer, inventory, market order, limit order] September 2006 Corresponding author: Carol Osler, cosler@brandeis.edu or Brandeis International Business School, Brandeis University, Mailstop 32, Waltham, MA 02454, USA. Tel. (781) 736-4826. Fax (781) 736-2269. We are deeply grateful to the bankers who provided the data and to William Clyde, Pete Eggleston, Keith Henthorn, Valerie Krauss, Peter Nielsen, Peter Tordo, and other bankers who discussed dealing with us. We thank, without implicating, Alain Chaboud, Yin-Wong Cheung, Joel Hasbrouck, Thomas Gehrig, Michael Goldstein, Rich Lyons, Albert Menkveld, Anthony...
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...Venezuela Sues to Shutter U.S.-Based Black-Market Currency News Site Summary: Venezuela has long tried to control their currency through propaganda. Their attempts seek to fix their currencies value despite its real value to foreigners around the world. An American website called “DollarToday” published black-market values of Venezuela’s tanking currency. Venezuela is seeking to sue that company for “cyber-terrorism.” They believe that the effects of the websites publication can destroy their economy. They also believe that the people behind the publication are writing for political or financial agendas. “It wreaks economic havoc on the central bank and the citizens of Venezuela,” the lawsuit says “and it creates the false impression that the central bank and the republic are incapable of managing Venezuela’s economy.” Currently, one US dollar is costing Venezuelans about 130 times the amount of the fixed official value. It is also estimated that Venezuela’s economy will contract another 10% this year and inflation will reach 160%. The government is also avoiding using the dollar, which has caused huge food and basic good shortages, as they are unable to pay for imports. This allegation towards DollarToday is the next effort that Venezuela has taken to try and draw the blame to exterior sources. The last effort was closing the boarder to Colombia and putting the blame on immigrants for their food shortages and lack of public services. With millions of followers, DollarToday...
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...Performance and Trading In Currency Markets Name Course Professor/ Tutor University City/State Date Table of Contents 1.0 Introduction 4 1.1 Proposal 4 1.2 Research Questions 5 2.0 Literature review 5 2.1 Traditional Portfolio Measures …………………………………………………………….6 a. Sharpe ratio: 6 b. Treynor ratio: 7 c. Jensen Alpha: 8 d. Fama-French Model 10 2.2 Assumption to Models ……………………………………………………………………11 2.3 Possible Results ……………………………………………………………………………11 2.4 Limitations of the traditional models ……………………………………………………12 3.0 Academic Review 14 3.1 Types of Analysis Applied in Currency Markets ……………………………………14 3.2 Empirical Literature Review ……………………………………………………………17 3.2.1 Hedging in the Currency Market ……………………………………………………19 4.0 Individual Currency Index Returns ……………………………………………………20 4.1.1 The Factors ……………………………………………………………………………21 a. Trend 21 b. Value 22 c. Volatility 22 4.2 Individual Currency Manager Returns ……………………………………………………23 5.0 Limitation to study ……………………………………………………………………25 6.0 Critique of Data source ……………………………………………………………………26 7.0 Results From Previous studies ……………………………………………………………29 8.0 Conclusion 30 References List 31 Performance and Trading In Currency Markets 1.0 Introduction The financial money market or the currency market is one of the markets that reports high trading volume. Most investors are keen in the trends of financial markets both from a local and an international perspective (Fanchiotti...
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...TRANSACTION (SUPPLY AND DEMAND) OF CURRENCY TAKES PLACE IN THE FOREIGN EXCHANGE MARKET By ABIOLA BAKARE MONROE COLLEGE MBA FINANCE Foreign exchange markets facilitate the trade of one foreign currency for another. Most exchanges are made in bank deposits and involve U.S. dollars. Over a trillion dollars in foreign exchange trades take place every day; foreign exchange dealers handle most transactions. Businesses, financial institutions, governments, investors, and individuals use the foreign exchange markets to adjust their currency holdings. The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. In terms of volume of trading, it is by far the largest market in the world. The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. The foreign exchange market works through financial institutions, and it operates on several levels. Behind the scenes banks turn to a smaller number of financial firms known as “dealers,” who are actively involved in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the “interbank market”, although a few insurance companies...
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...Measuring/Managing Translation and Transaction Exposure Chapter 10 Lecture Notes Measuring Translation and Transaction Exposure PART I. ALTERNATIVE MEASURES OF FOREIGN EXCHANGE EXPOSURE: Accounting and Economic Risk I. ALTERNATIVE MEASURES A. TYPES 1. Accounting Exposure: arises when reporting and consolidating financial statements require conversion from subsidiary to parent currency. 2. Economic Exposure: arises because exchange rate changes alter the value of future revenues and costs. Accounting Exposure B. Accounting Exposure = Transaction risk + Translation risk [pic] ALTERNATIVE MEASURES OF FOREIGN EXCHANGE EXPOSURE C. Economic Exposure = Transaction Exposure +Operating Exposure Operating Exposure arises because exchange rate changes alter the value of future revenues and costs. PART II. ALTERNATIVE CURRENCY TRANSLATION METHODS (ACCY) I. FOUR METHODS OF TRANSLATION A. Current/Noncurrent Method 1. Current accounts use current exchange rate for conversion. 2. Income statement accounts use average exchange rate for the period. B. Monetary/Nonmonetary Method 1. Monetary accounts use current rate 2. Pertains to - Cash - Accounts receivable - Accounts payable - Long term debt 3. Nonmonetary accounts - Use historical rates - Pertains to: Inventory, Fixed assets, Long term investments 4. Income statement accounts - Use average...
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...would happen if Brazil allowed the real to float freely in FX markets: a. Immediately If the government did not intervene to weaken the real to around R$2, I suspect the real would be much stronger. This would propel imports and also capital inflow into the country due to the high interest rates. Since the government wanted to make Brazil competitive for exports, a weak currency would dissuade companies from exporting since they would earn less in revenue for every $ exported. Further with a free currency and no capital controls, the ease of investing and removing capital would make the Brazilian stock market (which as it is, is very small) more susceptible to foreign capital. b. Medium term (1-2 years)? In the medium term, the movement in the real would dependent on several factors such as: global sentiments, status of the euro crisis, relative attractiveness of other market (such as Mexico, Africa, South East Asia) etc., However it would be ideal if the real was stable in the range of R$2 +/- 10% This would ensure stability in the economy and capital markets. A strong currency would encourage imports while a weak currency would discourage investments. Further a weak currency would also make the corporates in Brazil nervous as they will need to pay more reals for every $ of debt on their books. Would these be adverse developments for Brazil? Why? I think it is important to have stability in the currency before allowing it to float freely. Brasil is still an emerging...
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...companies invoice the products in U.S. dollars. Is Aggie’s transaction exposure likely to be significantly affected if the euro strengthens or weakens? Explain. If the euro weakens for several years, can you think of any change that might occur in the global chemicals market? ANSWER: If the euro strengthens, European customers can purchase Aggie’s goods with fewer euros. Since Aggie’s competitors also invoice their exports in dollars, Aggie Company will not gain a competitive advantage. Nevertheless, the overall demand for the product could increase because the chemicals are now less expensive to European customers. If the euro weakens, European customers will need to pay more euros to purchase Aggie’s goods. Since Aggie’s competitors also invoice their exports in dollars, Aggie Company may not necessarily lose some of its market share. However, the overall European demand for chemicals could decline because the prices paid for them have increased. If the euro remained weak for several years, some companies in Europe may begin to produce the chemicals, so that customers could avoid purchasing dollars with weak euros. That is, the U.S. exporters could be priced out of the European market over time if the euro continually weakened. 3....
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...Describe the origins and evolution of the Eurocurrency markets and the key financing instruments they provide for firms and organisations operating internationally. Why did these markets grow so fast and what are the advantages of raising finance through them for international businesses and organisations? http://homepages.uel.ac.uk/K.Bain/euromarkets.pdf https://ulib.derby.ac.uk/ecdu/CourseRes/dbs/economic/Gow13.pdf http://site.ebrary.com/lib/leicester/reader.action?docID=10232762 The Euromarkets can be broadly divided into two types: Eurocurrency and Eurobond markets. The Eurocurrency market plays a crucial role in international finance and they are the most important international financial markets today. It provides the most convenient financial service to international businesses and organisations as the nature of the market and its free convertibility. This essay will introduce the origins, begin with the definition and background of Eurocurrency market and some basic characteristics of the market, and development of Eurocurrency markets and will also find out what the financial techniques they provide for companies and organisations are. In next section, it will focus on explaining the reason why the Eurocurrency markets develop in high-speed and finding what the advantages of using Eurocurrency markets to raise fund for companies and organisations operating internationally are. The US dollar, the Eurozone euro, the British pound and the Japanese yen are the...
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...Stable Currency Solution - An Alternative to a Single Currency By: A. Karim Afshar (PhD Finance) 2004 Executive Summary • The Unity (U) is a global single currency solution designed to mitigate the adverse impact of exchange rate volatility. • The Unity currency will be composed of a weighted average of around 15 prominent global currencies, creating the underlying portfolio or “Unity Basket”. • Changes to the value of a currency in the Unity Basket will only have an impact on the overall Unity value proportional to that currency’s portfolio weighting. • The Unity could be launched by a combination of the European Central Bank, Bank of England or Federal Reserve. However, Unity supply must not be controlled by any single national government. • After its initial launch, market forces will ensure growth in demand and supply. • Preliminary demand is expected especially from countries with a high balance of trade, developing countries, consumers and small businesses. 2 UNITY (U) - A World Common Currency Solution By: A.Karim Afshar (PhD Finance) Introduction Exchange rate volatility has become one of the greatest obstacles to the world’s economic stability and growth. A great many discussions have taken place on how to combat money market attacks on national currencies and how to keep currency fluctuations within economically tolerable levels. These discussions assume that the world financial system and currencies are and...
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...if we called up corporations, and corporations. So we had to no control over the spreads of any currency. As far as our primary objective was concerned, we tried to take advantage of the volatility of the market to obtain, we hoped, the most favourable deals in order to use the minimum amount of Euros to obtain the maximum amount of Japanese Yens and British Pounds. Our market view was closely linked with our speculative strategy. We anticipated that British Pound would be depreciating against the US Dollar as well as other currencies concerned in the dealing section in the short term because investors were expecting considerable rates cut would likely to be implemented by the Bank of England and the European crisis seemed to be being dealt with and investors were trying to take advantage of positive news about the crisis. Due to the aforementioned points, we chose to use Euro or US Dollar to speculate. Since we were given Euro as our starting currency, we did not need to implement any transaction, we could just keep Euro and observe the movement of this currency so as to make adjustments. We also planned to convert Euro into US Dollar if we thought the profitability of the US/GBP currency was better. Performance Analysis In the beginning of the section, we did not trade immediately as the market views of our team members did not coincide and we also had doubt as to which currency we need to raise first. Eventually, we decided to raise Japanese Yens first and then Euro. During...
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...the countries of the euro-zone, with a policy that was originally based on satisfying growth, low to no inflation, low unemployment and lower and more stable prices, as well as elimination of conversion fees, deeper financial markets, and lower volatility therein. It has been successful in accomplishing most of those objectives, even though some are openly disputed. Whether the euro as a whole is successful remains to be seen, since the question if the euro-zone in itself is suitable for monetary union is left largely unanswered. Two criteria are met with, and two are not. The key success factor now and in the future will be the policy of the ECB, which is dual; fight of inflation at the expense of economic growth or vice versa. How long the policy of the ECB can count on the trust of its members depends largely on movements in the world economy, the financial markets and the ability of policy makers to shroud the efforts in political correctness. ii. Table of contents i. Executive Summary p. 2 ii. Table of Contents p. 3 iii. Preface p. 4 1. Euro History p. 6 2. The European Monetary System p. 7 3. The early nineties currency crisis p. 8 4. Convergence program p. 10 5. Launch of the euro as a currency p. 12 6. The benefits of the euro p. 16 7. European Central Bank Policy and promises p. 23 8. The future of the European Monetary System p. 25 9. Conclusion p. 27 10. Bibliography...
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...to 1545 What is Rupee Appreciation & Rupee Depreciation Rupee Appreciation & Rupee Depreciation (instead of using the word ‘currency’ we are using ‘rupee’ for the Indian context and explain the fluctuation with respect to dollar). When rupee is said to be appreciating it means that our currency is gaining strength and its value is increasing with respect to dollar. However, when rupee depreciates it means our currency is getting weaker & its value is falling with respect to dollar. You can understand it with the following example: Suppose, currently, the exchange rate is Rs. 45 = $1, 10 months later, either of the following two cases can happen Case1: The exchange rate is say Rs. 40 = $1. This means rupee has appreciated or gotten stronger by approx 11% and you would be paying less to for a dollar Case2: The exchange rate is at Rs. 50 = $1. This means rupee has depreciated or gotten weaker by approx 11% and you end up paying more for a dollar. Factors Influencing rupee fluctuation Rupee’s appreciation or depreciation against the dollar depends on the change in demand and supply for both the currencies. If the demand for rupee is comparatively high, rupee appreciates; if low, it depreciates. The important question here is ‘what factors drive the demand for a currency?’ They are: * Interest Rate: A demand for a currency is hugely dependent on the interest rate differential between two countries. A country like India where int. rate is around 7-8% experiences...
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...Dzhalil Atakeev Finance 190 Professor Shlyakhov 10/21/2013 Asian Currency Crisis The Asian Currency Crisis started in Thailand. The crisis just reflected structural and policy misinterpretation of the Asian region. Fundamental imbalances triggered the currency and financial crisis in 1997, due to crisis markets overreaction and herding caused the plunge of exchange rates, asset prices and economic conditions. Everything started from Thailand, before 1997 the economy grew was very high in Thailand, it was averaging 9% per year. The rate between USD and Baht was $25 per 1 baht. The 1997 was crucial for Thailand because massive speculators attacked Thai baht. The spark on Asian crisis was when prime minister of Thailand announced that he would not devalue the baht, and government just couldn’t defend baht, which was fixed to several currencies, one of the dominant components was USD. The decrease in economy of Thailand cause massive layoffs in finance, real estate, and construction that resulted many people to return their villages and countries. The Thailand baht was devaluating and by 1998 it reached lowest value of 58 baht over 1 USD. Without any support from foreign reserves Thai government had to float the baht, so that way baht was set on currency market. Since baht was pegged to other currencies crisis spread to another Asian countries. By 2001, Thailand's economy had recovered. The increasing tax revenues allowed the country to balance its budget and repay its debts...
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...JEL classification: F31 F36 F41 O24 Keywords: Impossible trinity International reserves Financial liberalization Financial crisis Exchange rate regime This paper investigates the potential impacts of the degree of divergence in open macroeconomic policies in the context of the trilemma hypothesis. Using an index that measures the relative policy divergence among the three trilemma policy choices, namely monetary independence, exchange rate stability, and financial openness, we find that emerging market countries have adopted trilemma policy combinations with the least degree of relative policy divergence in the last 15 years. We find that a developing or emerging market country with a higher degree of relative policy divergence is more likely to experience a currency or debt crisis. However, a developing or emerging market country with a higher degree of relative policy divergence tends to experience smaller output losses when it experiences a currency or banking crisis. Latin American crisis countries tended to reduce their financial integration in the aftermath of a crisis, while this is not the case for the Asian crisis countries. The Asian crisis countries tended to reduce the degree of relative policy divergence in the aftermath of the crisis, probably aiming at...
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