Brian David Butler Professor of international finance and global entrepreneurship with Forum-Nexus Study Abroad. Guest lecturer with the IQS Business School of the Ramon Llull University in Barcelona, and the Catholic University of Milan . Previously, Brian taught finance, economics and global trade courses at Thunderbird’s Global MBA program in Miami, and worked as a research analyst with the Columbia Business School in New York City. Brian currently lives in Recife, Brazil where he is teaching classes on “Global Entrepreneurship” at the university FBV. A global citizen, Brian was born in Canada, raised in Switzerland (where he attended international British school), educated through university in the U.S., started his career with a Japanese company, moved to New York to work as an analyst, married a Brazilian, and has traveled extensively in Latin America, Asia, Europe and North America. [email_address] LinkedIn/briandbutler Skype: briandbutler
Many markets ….banks set the market for FX trading
There is no such thing as “THE” exchange rate.
There are many
Arbitrage is the mechanism that equalizes exchange rates across markets….
Its how FX rates are set
Structure of the U.S. Foreign Exchange Market Adapted from St. Louis Fed Review (March 1984) p. 9, by Robert Grosse Stockbrokers CLIENT with $US who wants to buy euros Local Bank Stockbrokers C M E (I M M) P S X Foreign Exchange Brokers CLIENT with euros who wants to buy $US Local Bank NEW YORK INTERBANK MARKET CHIPS
1. US Exporters US Importers Paying in £ 2. British Direct Investors US Direct Investors in the UK 3. US Foreign Investors Remitting Profits British Foreign Investors in the US Remitting Their Profits 4. British Portfolio Investors US Portfolio Investors in the UK 5. Bear Speculators Bull Speculators 6. Arbitrageurs 7. Government “interveners” The Foreign Exchange Market for £ In New York Suppliers of Pounds Demanders for Pounds P $/£ XR 0 pounds Q eq Q S £ D £
The World’s Money Flows Daily Currency Market Turnover ($billion) Net of Local Double-Counting; No Adjustment for Cross-Border Double-Counting Source: BIS
London = 1.3 trillion dollars traded per day. US = 600 billion traded per day….more than entire circulation of the USA
Banks trading deposits with each other = only important driver of “the” FX market.
Daily Global Foreign Exchange Market Turnover* by Market Segment, April 1989 – April 2007 *Adjusted for local and cross-border inter-dealer double-counting ($ billion) 590 820 1190 1490 1210 1880 3210
Imagine you are a Swiss producer of machine parts. You found a customer in Europe willing to pay (upon delivery) …1 million Euros for a truck of parts, to be delivered in 6 months. Imagine your estimated profit margin is just 5%. In 20 words or less, describe your currency risk (what are you afraid might happen?).