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FINS1612 Exam Notes
Understand the nature of global FX markets o Floating exchange rate regime – the exchange rate for a country is allowed to move as factors of supply and demand o AUD, USD, GBP, JPY, EUR o Not controlled by government or central bank (though it can influence the exchange rate when there is rapid appreciation or depreciation i.e. slow it down) o Managed float regime – allows currency to move within a defined range relative to another currency o Crawling peg regime – allows the currency to appreciate gradually over time but within a range established by the government o Pegged rate – currency directly linked to another country
Discuss participants in the FX markets o FX dealers and brokers o Central banks – influence exchange rate, change composition of holdings of foreign currencies in managing official reserve assets, purchase foreign currency to pay government imports and interest on or redeem government debt o Firms conducting international trade o Exporters – sell foreign currency and buy AUD o Importers – buy foreign currency and sell AUD o Investors and borrowers in the international money markets and capital markets – investing overseas o Foreign currency speculators – anticipate future rates to make a profit o Arbitrageurs – no risk exposure; o Geographic – taking advantage of when two dealers in different locations quote different rates on same currency o Triangular – taking advantage of when 3 or more currencies are out of alignment Describe the functions and operations of FX markets o Operates 24 hrs a day o Typically the same rates globally (no arbitrage profits available) o Sophisticated global telecommunication systems utilised
Outline instruments traded in FX markets o Spot transactions – set an exchange rate today for delivery and settlement in 2 business days o Forward FX transactions – set an exchange rate today for delivery and...

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