Week 17 Flashcards
What is money?
Money is an essential element of the international financial environment, playing, as it does, an extremely important roles for business.
A medium of exchange—money allows businesses to receive payment from customers, both at home and abroad, and to pay their suppliers.
A common measure of value—money enables firms to place a value on the goods and services that they buy and sell.
Divisibility—money can be broken down into different units of value, such as cents and dollars or pence and pounds, facilitating the process
of exchange.
A store of wealth—money gives business the ability to store wealth. Businesses can build up reserves of money now, which can be used
later to buy goods and services, or to invest.
What is a foreign exchange?
Foreign exchange is money denominated in the
currency of another nation or group of nations
(e.g., EU).
The market in which such transactions take place
is the foreign-exchange market.
An exchange rate is the price of a currency—
specifically, the number of units of one currency
that buy one unit of another currency.
How is the foreign exchange rate determined? (Part 1)
Supply and Demand
Demand↑ => Currency Value↑ , Demand↑ => Currency Value↑
Demand↓ => Currency Value↓ , Demand↓ => Currency Value↓
For example: When demand for US dollars rises due to increased trade with the US, the dollar’s
value strengthens relative to other currencies, like the Euro.
Interest Rates: Higher interest rates set by central banks tend to attract foreign investment,
boosting demand and strengthening the currency, while lower interest rates can weaken it.
How is the foreign exchange rate determined? (Part 2)
Economic Indicators: Exchange rates are influenced by economic indicators like GDP growth, inflation, unemployment, and trade balance.
For example: If the US reports strong economic growth, investors might be more likely to invest in US assets, increasing demand for dollars.
Political Stability: Countries with stable political systems tend to have stronger currencies, as investors seek security.
Market Speculation: Forex markets are influenced by speculation; if traders expect a currency to strengthen due to economic or political events, they may buy more of it, driving up its value.
Government Intervention: Some governments use central banks to intervene in forex markets, buying or selling their currency to stabilize or influence its value.
What Global Foreign Exchange Instruments are used?
Spot transactions involve the exchange of currency for delivery in two business days the day the transaction was made. (e.g., a bank would quote an exchange rate for a transaction on Monday, but delivery would take place on Thursday).
Forward transactions involve the exchange of currency on a future date. It is sale of a currency for future delivery. The rate at which the transaction is settled is the forward rate and is a contract rate between the two parties.
FX Swap, one currency is traded for another on one date and then swapped
back later
How Foreign Exchange is Traded?
Dealers can trade foreign exchange:
directly with customers,
through brokers,
through electronic,
brokerage systems, or
directly through interbank.
How does Global financial markets impact on businesses?
Currency exchange rate fluctuations impact import costs, export competitiveness, and profitability, particularly for companies engaged in international trade.
Changes in interest rates and investor sentiment affect financing costs. Low interest rates reduce
borrowing costs, encouraging business expansion, while high rates increase loan costs, potentially
limiting growth.
Global market trends influence stock prices, affecting companies’ valuations and investor confidence. Businesses dependent on capital markets may find it easier or harder to raise funds depending on current market conditions.
Economic instability in key markets can disrupt supply chains, alter consumer demand, and create
uncertainty, affecting business operations and strategy.
What are Bank for International Settlements?
(BIS) has 60 members
It serves as an international central bank for national central banks, such as the Federal Reserve, the European Central Bank, and the Bank of China.
The BIS deals with the central banks on a daily basis and, by buying and selling foreign currencies and gold, helps them manage their foreign currency and gold reserves.
It also advises the central banks, and other international institutions, on how to prevent financial fraud
Who are international Monetary Fund?
Which has 189 members, was established to preserve international financial stability.
Member countries contribute funds to a pool from which they can borrow on a temporary basis when running balance of payments deficits.
Applicants for loans in the past have faced IMF demands for changes in government policy, such as cutting public expenditures on social
programmes, reducing subsidies on necessities, increasing taxes, eliminating import tariffs, and the privatization of publicly owned assets
Who are World Bank?
The World Bank, with 189 member countries, was set up to reduce global poverty and to improve standards of living.
It provides low-cost loans and interest-free credit to developing countries for education, health, and for the development of infrastructure projects in water supply, transport, a communications.
It also advises the central banks, and other international institutions, on how to prevent financial fraud.
Who are European central bank?
The European Central Bank (ECB) is the central bank for countries that are members of the Eurozone (19 in 2017).
main job is the control of inflation using the tools of monetary policy, in other words the money supply, and interest rates, to achieve price stability.
It carries out the tasks typically associated with national central banks.
Who are private financial institutions?
Such as Banks, insurance companies, pension funds, investment trusts.
Retail banks take deposits from private individuals, firms, and other bodies.
Insurance companies, pension funds, and unit trusts collect longer-term savings, which they then invest in a variety of stocks and shares.
Investment banks (also called merchant banks) provide a range of financial services to business.
Private equity funds, including venture capital companies, are another source of funding for business.
What are Shadow Banks?
Shadow banks are some regulated and some not,
offering a ‘vast array’ of new, high risk, complex
financial products that do not appear in their balance sheets.
The shadow banking system includes institutions like insurance companies, pension funds, hedge funds, investment trusts, money lenders, and peer-to-peer lending websites.
Estimated the size of global shadow banking assets at $92 trillion in 2015.
What are functions of financial institutions?
Mobilizing Savings and Providing Credit
Payment Facilities (e.g., SWIFT, Visa International
and MasterCard, PayPal, and China’s Alibaba).
Long-term Finance Needs
Spreading the Risk (to spread the risk by investing in a range of projects.)
