Ch 2 Flashcards
Foreign exchange markets
Currencies are exchanged or traded in foreign exchange markets
Three reasons entities participate
1) MNCs and others have business-related needs to buy or sell foreign exchange
2) Banks and other intermediaries profit from facilitating foreign exchange transactions.
3) Investment funds have portfolio-related needs to buy and sell foreign exchange
Participants in the foreign exchange markets
MNC, banks, Other financial institutions, governments, individuals
Which financial market is the largest
Foreign exchange market
Most transactions in the foreign exchange market include what currency?
USD
Define Vehicle currency
one currency is traded into another currency, which is traded for the desired currency
How are most transactions in the foreign exchange markets conducted?
Electronic networks
Structure of the market
market makers, dealers and brokers, settlement
Clearing system
essentially a secured network that processes financial messages or instructions
Swift
a clearing system used in some of the foreign exchange markets
Direct quotes
express the value of a foreign currency in terms of the domestic currency
Indirect quotes
express the value of the domestic currency in terms of the foreign currency
Base currency
one that is being bought or sold.
Terms currency
the one used to buy or sell the base currency
Bid
Amount the bank will pay for a currency
Ask
Amount the bank asks for a currency
Spread
Difference between the bid and the asked
Cross rates
Quotes may also be found, however, by relating on e foreign currency to another foreign currency
Eurodollar transactions
Eurocurrency or foreign currency transaction sin the USD
LIBOR (London Inter Bank Offered Rate)
The rate Eurobanks offer for loans to other institutions
How are LIBOR & LIBID related?
LIBOR is the London banks ask rate, LIBID is the London banks bid rate
Bid-Ask spread % =?
(Ask - Bid)/Ask
Floating rate note
Floating rate financial instruments with coupon interest linked to the LIBOR or other indicative rates such as the EURIBOR
Eurobonds
A U.S. based MNC issues a USD denominated bond in Japan, the bond is categorized as a Eurobond
Foreign bond
a bond issued in a particular country by a foreign issuer and denominated in the country’s own currency.
