Article Title and Date of the Article .docx

Article
Title
and
Date
of
the
Article
The
Economist
“Insider
dealing:
euro
outs
fear
that
euro
ins
might
do
them
down”
October
17,
2015

Summary
This
article
posted
as
a
special
news
report
by
The
Economist,
is
focused
on
the
Eurozone
and
European
Union,

and
how
they
are
experiencing
some
problems
that
might
hurt
both
the
euro
currency
and
relations
with
non-‐-‐-‐euro
zone
countries.
At
the
moment,
in
Europe
there
are
two
types
of
observers:
the
Europhiles
and

Euroskeptics.
The
Europhiles
are
those
who
admire
Europe
and
favor
the
participation
of
the
European
Union,
while
on
the
other
side
of
the
spectrum
are
the
Euroskeptics,
who
are
those
who
are
opposed

to
increasing
the
powers
of
the
European
Union.
Currently,
the
alarming
political
issue
that
has
been
growing
in
Europe
is
the
negative
relationship
between
those

countries
that
belong
to
the
European
Union
and
Eurozone,
against
those
who
are
members
of
the
European
Union
but
not
the
Eurozone.
The
argument
here
is
that
those
members
belonging
to
the
Eurozone

have
been
meeting
together,
while
excluding
non-‐-‐-‐Eurozone
members
and
making
decisions
such
as
bails,
which
affect
all
countries
within
the
European
Union.
The
Eurozone
countries
believe
that
that
only
those
countries
that
are
members

of
the
Eurozone
should
be
allowed
to
voice
their
opinions
and
make
decisions
on
everything
regarding
the
euro,
since
they
are
the
ones
directly
affected
by
it.
On
the
other
hand,
the

non-‐-‐-‐Eurozone
countries
feel
like
the
euro
members
are
“ganging
up”
on
them,
meaning
that
they
feel
like
those
countries
in
the
Eurozone
are
making
decisions
regarding
their
own
interests,
and
not
the
collective
interests

of
all
members
of
the
European
Union.
Association
to
specific
chapter
material
and
concepts
2.4
A
Single
Currency
for
Europe:

The
Euro
(40)
Chapter
2
discusses
the
global
financial
environment
including
the
European
Union,
the
Eurozone
and
the
impact
of
the
Euro
in
the
markets.
10.1
Types
of
Foreign
Exchange

Exposure
(272)
Chapter
10
introduces
the
various
types
of
exposure
to
foreign
currency
fluctuations
That
firms
face.
Political
problems
as
those
seen
from
the
article
can
cause
major
currency
fluctuations
in

the
euro
exchange,
which
is
a
concern
for
companies
conducting
international
business
using
euros.
Concepts
Euro

–
A
single
new
currency
unit
adopted
by
the
11
participating
members
of
the
European
Union’s
European
Monetary
System
in
January
1999,
replacing
their
individual
currencies.
European
Union
–
The
official

name
of
the
former
European
Economic
Community
as
of
January
1,
1994.
Eurozone
–
The
countries
that
officially
use
the
euro
as
their
currency.
Translation
exposure
–
measures
changes

in
the
value
of
outstanding
financial
obligations
incurred
prior
to
a
change
in
exchange
rates
but
not
due
to
be
settled
until
after
the
exchange
rates
change.
Thus,
it
deals
with
changes
in
cash

flows
that
result
from
existing
contractual
obligations.
Translation
exposure
–
is
the
potential
for
accounting-‐derived
changes
in
owner's
equity
to
occur
because
of
the
need
to
“translate”
foreign
currency
financial

statements
of
foreign
subsidiaries
into
a
single
reporting
currency
to
prepare
worldwide
consolidated
financial
statements.
Operating
exposure
–
also
called
economic
exposure,
competitive
exposure,
or
strategic
exposure,
measures
the
change
in

the
present
value
of
the
firm
resulting
from
any
change
in
future
operating
cash
flows
of
the
firm
caused
by
an
unexpected
change
in
exchange
rates.
The
change
in
value
depends
on
the
effect

of
the
exchange
rate
change
on
future
sales
volume,
prices,
and
costs.
Currency
risk
–
is
the
variance
in
expected
cash
flows
arising
from
unexpected
exchange
rate
changes.

Reasons
for
selection
The
reason
I
chose
this
article
is
because
it
demonstrates
how
countries
have
to
work
together
for
an
improved
global
environment.
If
they

do
not,
they
will
experience
greater
problems
in
their
economies,
businesses,
and
investments
both
in
the
domestic
and
global
markets.
Additionally,
chapters
10-‐-‐-‐18
cover
extensively
“foreign
exchange
risk
management”
and
this
article
is

a
perfect
example
in
which
we
can
see
the
concepts
we
learn
in
class,
be
applied
in
the
real
world.
The
issues
discussed
in
the
article
have
caused
greater
currency
exposure

in
the
global
markets.
Basically,
the
euro
currency
is
suffering
as
foreign
investors
begin
doubting
its
stability,
and
start
regarding
it
as
a
riskier
currency
than
it
was
before.
In
addition
to
this,

many
businesses
and
investors
in
the
European
Union
have
been
experiencing
losses
from
the
low
euro
currency
values
in
recent
times.
Important
points
or
lessons

learned
from
this
article
An
important
point
that
the
article
makes
is
that
even
though
there
are
many
issues
at
the
moment
between
Euro
countries
and
non-‐-‐-‐Euro
countries,
one
thing

that
both
opposing
sides
(the
Europhiles
and
Euroskeptics)
can
both
agree
on
is
that
if
the
euro
zone
does
survive,
it
would
have
to
make
arrangements
for
a
stronger
political
integration,
bail-‐-‐-‐out
fund,
an

establishment
of
a
central
bank
that
acts
as
a
lender
of
last
resort,
and
an
improved
and
proper
banking
union.
The
most
important
lesson
to
take
away
from
this
article
is

the
fact
that
we
can
apply
some
of
the
concepts
learned
in
International
Financial
Management
such
as
how
exchange
risks
and
exposures
can
be
linked
to
the
economic
and
political
situations
of
countries.

We
can
clearly
see
it
portrayed
in
this
article
that
speaks
about
the
political
and
financial
management
issues
that
countries
in
the
European
Union
should
try
to
solve
in
order
to
succeed.

12/12/17
1
Copyright © 2018, 2015, 2012 Pearson Education, Inc. All
Rights Reserved
Fundamentals of Multinational Finance
Sixth Edition
Chapter 5
The Foreign Exchange
Market
Rights Reserved
Learning Objectives
5.1 Explore the multitude of functions of the foreign
exchange market
5.2 Detail how the structure of the global foreign exchange
market has evolved
5.3 Describe the financial and operational transactions
conducted in the foreign exchange market
5.4 Examine the forms of currency quotations used by
currency dealers, financial institutions, and agents of all
kinds when conducting foreign exchange transactions

12/12/17
2
Rights Reserved
Functions of the Foreign Exchange Market
• The foreign exchange market is the mechanism by which
participants:
– transfer purchasing power between countries
– obtain or provide credit for international trade
transactions
– minimize exposure to the risks of exchange rate
changes
Rights Reserved
Structure of the Foreign Exchange
Market (1 of 8)
• The Global Trading Day
– The foreign exchange market spans the globe, with
currencies trading somewhere every hour of every
business day
12/12/17

3
Rights Reserved
Exhibit 5.1 Global Currency Trading: The
Trading Day
Rights Reserved
Market (2 of 8)
• Market Participants – The Players
– Participants in the foreign exchange market include liquidity
seekers and
profit seekers.
– Five broad categories of institutional participants operate in
the market
§ Bank and nonbank foreign exchange dealers
– Profit from buying foreign exchange at a bid price and
reselling it
at a slightly higher ask price
§ Individuals and firms conducting commercial or investment
transactions
– Use the foreign exchange market to facilitate execution of
commercial or investment transactions
§ Speculators and arbitragers
– Seek to profit from trading within the market itself

12/12/17
4
Rights Reserved
Market (3 of 8)
• Market Participants – The Players
– Five broad categories of institutional participants operate in
the market (continued)
§ Central banks and treasuries
– Use the market to acquire or spend their country’s
foreign exchange reserves as well as to influence the
price at which their own currency is traded
§ Foreign exchange brokers
– Facilitate trading between dealers without
themselves becoming principals in the transaction
Rights Reserved
Market (4 of 8)
• Evolution of the Market
– How currency rates are quoted, prices posted, and

trades consummated, confirmed, and settled—across
borders, time zones, and oceans—has all changed
very quickly
– The foreign exchange market is the world’s largest
financial market
– It is a market without a single dealer, a single
exchange, a single global regulator, or even a single
price
– It is today considered to be the world’s most pure
competitive market
12/12/17
5
Rights Reserved
Exhibit 5.2 Evolution of the Modern
Currency Trading Marketplace
Rights Reserved
Market (5 of 8)
• The Evolution of FX Trading
– 1985
§ Limited price discovery capability

§ Trades conducted over the phone
– 1990’s
§ Instantaneous access to market data via computer
§ Market only accessible by intermarket dealers
– 2010
§ Trades are conducted electronically
§ Separation of the interdealer and customer markets has
effectively broken down
12/12/17
6
Rights Reserved
Exhibit 5.4 The Foreign Exchange Market
Today
Rights Reserved
Market (6 of 8)
• The Three Components of FX Trades
– The foreign exchange trade transaction agreement—

the interaction of dealers, brokers, and aggregators
– Electronic communication and notification for payment
settlement
– Final settlement of the currency trade
12/12/17
7
Rights Reserved
Market (7 of 8)
• The Three Components of FX Trades
– Instructions for foreign exchange trades are executed through
the Society
for Worldwide Interbank Financial Telecommunication (SWIFT)
§ The SWIFT network sends payment orders, but it does not
facilitate
the actual settlement
§ Settlement of a foreign exchange trade is made by
correspondent
accounts that the banks and institutions have with each other
– Continuous Linked Settlement (CLS)
§ Specialist bank provides settlement services to its members
for
foreign exchange trades

– Payment versus Payment
§ settlement service where both sides’ payment instructions for
an FX
transaction are settled simultaneously
Rights Reserved
Market (8 of 8)
• FX Market Manipulation: Fixing the Fix
– London fix
§ The 4 p.m. daily benchmark rate used by a multitude of
institutions and indices for marking value
§ Market analysts had noted steep spikes in trading just prior to
the 4 p.m. fix, spikes that were not sustained in the hours and
days that followed
§ Traders were alleged to be exchanging emails, using social
networking sites, and even phone calls, to collaborate on
market movements and price quotes at key times
§ With more and more of the market’s transactions executed
electronically, computer algorithms were believed to be less
likely to pursue fraudulent trading for fixing given the speed
and frequency of transactions
12/12/17

8
Rights Reserved
Transactions in the Foreign Exchange
Market (1 of 6)
• Spot Transactions
– The purchase of foreign exchange with delivery and payment
between banks taking place normally on the second following
business day.
– Value Date
§ The date of settlement
– Clearing House Interbank Payments System (CHIPS)
§ Most dollar transactions in the world are settled through the
computerized CHIPS in New York
§ Calculates net balances owed by any one bank to another and
which facilitates payment of those balances by 6:00 p.m. that
same day in Federal Reserve Bank of New York funds
Rights Reserved
Exhibit 5.5 Foreign Exchange Transactions
and Settlements
12/12/17
9

Rights Reserved
Market (2 of 6)
• Forward Transactions aka Outright Forward Transactions
– Requires delivery at a future value date of a specified
amount of one currency for a specified amount of
another currency
– The exchange rate is established at the time of the
agreement, but payment and delivery are not required
until maturity
Rights Reserved
Market (3 of 6)
• Swap Transactions
– Spot Against Forward
§ A dealer buys a currency in the spot market and
simultaneously sells the same
amount back to the same bank in the forward market
– Forward-Forward Swaps
§ Example: A dealer sells £20,000,000 forward for dollars for
delivery in two
months at $1.8420/£ and simultaneously buys £20,000,000
forward for

delivery in three months at $1.8400/£
§ This swap can be viewed as a technique for borrowing another
currency on a
fully collateralized basis
– Nondeliverable Forwards (NDFs)
§ Possess the same characteristics and documentation
requirements as
traditional forward contracts, except that they are settled only in
U.S. dollars
§ The foreign currency being sold forward or bought forward is
not delivered
12/12/17
10
Rights Reserved
Market (4 of 6)
• Size of the Foreign Exchange Market
– A 2016 survey estimated daily global net turnover in
the foreign exchange market to be $5.1 trillion, a 5%
decline from its peak in 2013

Rights Reserved
Exhibit 5.6 Global Foreign Exchange
Market Turnover, 1989–2016
12/12/17
11
Rights Reserved
Market (5 of 6)
• Geographical Distribution
– London continues to be the world’s major foreign
exchange market in traditional foreign exchange
market activity with 37% of the global market, followed
by the New York with 19%
– Currency trading in Asia is growing due to the growth of
the Asian economies, markets, and currencies
Rights Reserved
Exhibit 5.7 Top 6 Geographic Trading
Centers in the FX Market
12/12/17

12
Rights Reserved
Market (6 of 6)
• Currency Composition
– The currency composition of trading indicates a
number of global shifts
§ The U.S. dollar increased its presence in global
currency trades
§ The Japanese yen and the European euro both
showed declines
§ The Chinese renminbi’s proportion, although small,
has recently doubled
Rights Reserved
Exhibit 5.8 Daily FX Trading by Currency
Pair (percent of total) (1 of 2)
12/12/17
13

Rights Reserved
Exhibit 5.8 Daily FX Trading by Currency
Pair (percent of total) (2 of 2)
Rights Reserved
Foreign Exchange Rates and Quotations (1 of 10)
• Foreign Exchange Rate
– The price of one currency expressed in terms of another
currency.
• Foreign Exchange Quotation (Quote)
– A statement of willingness to buy or sell at an announced rate
• Currency Symbols
– Quotations may be designated by traditional currency symbols
or by ISO codes
Currency Traditional Symbol ISO 4217 Code
U.S. dollar $ USD
European euro € EUR
Great Britain pound £ GBP
Japanese yen ¥ JPY
Mexican Peso Ps MXN
12/12/17

14
Rights Reserved
• Exchange Rate Quotes
– Every currency exchange involves two currencies: the base
or unit currency (CUR1), and the price or quote currency
(CUR2):
CUR1/CUR2
– The quotation indicates the number of units of CUR2
required in exchange for receiving one unit of CUR1
– Example:
EUR/USD1.2174
– Designates the euro (EUR) as the base currency, the dollar
(USD) as the price currency
§ The exchange rate is USD 1.2174 = EUR 1.00
Rights Reserved
Exhibit 5.9 Foreign Currency Quotations
12/12/17
15

Rights Reserved
• Market Conventions
– European Terms
§ Quoting of the quantity of a specific currency per one U.S.
dollar
§ Market practice for most of the past 60 years or more
– American Terms
§ Quoting the quantity of U.S. dollars per one unit of a specific
currency
§ Exceptions that use American Terms
– Euro
– U.K. pound sterling
– Australian dollar
– New Zealand dollar
Rights Reserved
– Currency Nicknames
§ Cable
– Exchange rate between U.S. dollars and U.K. pounds sterlin
§ Loonie
– Canadian dollar
§ Kiwi
– New Zealand dollar

§ Aussie
– Australian dollar
§ Swissie
– Swiss francs
§ Sing dollar
– Singapore dollar
12/12/17
16
Rights Reserved
– Direct and Indirect Quotations
§ Direct Quote
– Price of a foreign currency in domestic (home) currency units
• In Paris, a direct quote might be EUR 0.8214/USD 1.00
• The euro is the home currency
• In New York, the same “quote” would be USD 1.2174/EUR
1.00
• The dollar is the home currency
§ Indirect Quote
– Price of the domestic currency in foreign currency units

• In New York, the indirect quote would be EUR 0.8214/USD
1.00
• In Paris, the indirect quote would be USD 1.2174/EUR 1.00
Rights Reserved
– Direct and Indirect Quotations
§ The two quotes are equivalent, one being the
reciprocal of the other
=
1 USD1.2174
EUR 0.8214/USD EUR
12/12/17
17
Rights Reserved
– Bid and Ask Rates

§ Bid
– The price in one currency at which a dealer will
buy another currency
§ Ask
– The price in one currency at which a dealer will
sell the other currency
§ Bid-Ask Spread
– Ask price is slightly higher than bid price
Rights Reserved
Exhibit 5.10 Bid, Ask, and Mid-Point
Quotation
12/12/17
18
Rights Reserved
Exhibit 5.11 Exchange Rates: New York
Closing Snapshot (1 of 2)
Rights Reserved
Exhibit 5.11 Exchange Rates: New York
Closing Snapshot (2 of 2)

12/12/17
19
Rights Reserved
– Cross Rates
§ Many currency pairs are only inactively traded, so their
exchange rate
is determined through their relationship to a widely traded third
currency
– Example: The JPY/MXN exchange rate may not be directly
observable, but both are actively quoted versus the U.S. dollar
Currency per USD
Japanese yen USD/JPY 101.29
Mexican Peso USD/MXN 18.2692
– Cross-Rate Calculation
=
JPY101.29/USD
JPY5.5443/Ps
Ps18.2692/USD

Rights Reserved
• Intermarket Arbitrage
– Cross rates can be used to check on opportunities for
intermarket arbitrage
§ Example
Citibank quotes U.S. dollars per euro USD1.3297 = 1 EUR
Barclays Bank quotes U.S. dollars per pound sterling
USD1.5585 = 1 GBP
Dresdner Bank quotes euros per pound sterling EUR1.1722 = 1
GBP
– Cross rate Calculation
=
USD1.5585/GBR
EUR5.5443/GBP
USD1.3297/EUR
– The calculated cross rate of EUR 1.1721/GBP is not the same
as
Dresdner Bank’s quotation, so triangular arbitrage opportunity
exists
12/12/17
20

Rights Reserved
Exhibit 5.12 Triangular Arbitrage by a
Market Trader
Rights Reserved
• Forward Quotations
– Spot rates are typically quoted on an outright basis (all digits
expressed)
– Forward rates are typically quoted in terms of points or pips
Bid Ask
Outright spot JPY118.27 JPY118.37
Plus points (3 months) 1.43 1.40
Outright forward JPY116.84 JPY116.97
§ Cash Rates
– Forward rates of one year or less maturity
§ Swap Rates
– Forward rates for longer than one year maturity
12/12/17
21

Rights Reserved
Exhibit 5.13 Spot and Forward Quotations
for the Euro and Japanese Yen
Rights Reserved
Copyright
Assignment 1 Requirements
For your first assignment you need to summarize a recent
article. Your article summary
should relate to the material covered in your textbook. In the
back of your book, there is a
glossary of key terms that appear in the text. Your article
summary should correspond to key
concepts discussed in chapters 1 through 9.
Here is what you need to do for this activity:
* Find an article in one of the resources listed on the syllabus
(Wall Street Journal,
Business Week, Economist, Financial Times) or other similar
periodicals that discusses
one of these key terms. It needs to be a recent article (no older
than November 2018).
* Summarize the article and list its association to specific

chapter material or concepts in
your textbook. State the reason(s) for your selection.
* Provide a definition for the specific concept discussed in your
selected article. For
example, if the article discusses factoring you should include its
definition: factoring is the
act of selling a company’s receivables at a discount to a factor.
* List some important points or lessons learned from this
article.
* Provide a full copy of the article (links are not acceptable).
A sample article has been posted in the “Assignments” folder.

Article Title and Date of the Article .docx

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