This document provides information about foreign exchange markets, including: - The key players in foreign exchange markets are commercial banks, central banks, brokers and individuals. They facilitate the exchange of currencies for international trade and investment. - Exchange rates are quoted as either the number of home currency units needed to buy one unit of foreign currency (direct quote), or the number of foreign currency units needed to buy one unit of home currency (indirect quote). Dealers provide both bid and ask prices to earn a profit from currency exchanges. - Appreciation occurs when a currency can buy more of another currency, while depreciation is when it can buy less. Forward rates refer to the difference between future exchange rates and current spot rates

2. International Accounting and Finance
Issues
Dr. Albert Danso
Office HU 3.74
Surgery Hours:
Mondays 4 – 6pm

3. Week 17
Lecture 1
Foreign Exchange

4. • The euro, its history, benefits and disadvantages
• Causes of the euro crisis and its consequences
Recap (Week 16 Lec. 2)

5. • Examine the role of foreign exchange market in
international trade
• Examine the players of the foreign exchange
market
Learning Objectives

6. Foreign Exchange
A currency exchange rate
–Is simply the ratio of a unit of currency of
country A to a unit of the currency of
country B at the time of the buy or sell
transaction

7. Foreign Exchange
 Exchange rates affect large flows of
international trade by influencing the prices
in different currencies
 Foreign exchange also facilitates massive
flows of international investment, which
include direct investments as well as stock
and bond trades

8. Foreign Exchange
 In the foreign exchange market, trillions of
dollars are traded each day and the
economic implications of shifts in the
market can be dramatic.

9. Foreign Exchange
Because an exchange rate is the relative
price of two currencies, it may be quoted in
either of two ways:
1. The number of home currency units that can be
exchanged for one unit of foreign currency.
2. The number of foreign currency units that can be
exchanged for one unit of home currency.

10. Foreign Exchange
Knowing the format in which exchange
rates are quoted is essential to avoid
confusion, so we now establish a
systematic rule, even if it is arbitrary.

11. Defining Exchange
To avoid confusion, we must specify which
country is the home country and which is
foreign
For example, Denmark’s exchange rate
with the Eurozone is quoted as Danish
krone per euro (or kr/€).

12. Appreciation and Depreciation
 If one currency buys more of another
currency, we say it has experienced an
appreciation – its value has risen,
appreciated or strengthened.
 If a currency buys less of another currency,
we say it has experienced a depreciation –
its value has fallen, depreciated, or
weakened

13. Foreign Exchange Market
The Foreign Exchange Market provides:
 The physical and institutional structure
through which the money of one country is
exchanged for that of another country
 The determination rate of exchange
between currencies
 Is where foreign exchange transactions are
physically completed

14. Foreign Exchange Market
 The foreign exchange market spans the
globe, with prices moving and currencies
trading somewhere every hour of every
business day

15. Foreign Exchange Market
 In most centres, the foreign exchange
market has no central, physical market
place
 Business is conducted by screen trading or
by telephone or by a number of other
telecommunications mechanism
 The main dealers are commercial and
central banks

16. Foreign Exchange Market
 Most companies wishing to sell or buy
currency usually do so through a
commercial bank

17. 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

18. The players of foreign
Exchange Market
Individuals
Commercial Banks
Central Banks
Brokers

19. The players of foreign Exchange
Market
Individuals:
Individuals and companies need foreign
currencies for business or travel
Commercial Banks:
are the sources from which companies and
individuals obtain their foreign currency

20. The players of foreign Exchange
Market
Central Banks
They are involved in buying and selling of
home currency or foreign currency
They ensure that the exchange rate moves in
line with established targets set for it by the
government

21. The players of foreign Exchange
Market
Brokers
The foreign exchange brokers also bring buyers,
sellers and banks together and receive
commission on deals arranged.

22. Method of Quotation
A foreign exchange quotation (or quote) is a
statement of willingness to buy or sell at an
announced rate.
Foreign exchange dealers quote two prices
one for selling
one for buying

23. Method of Quotation
Foreign exchange quotes are at times
described as either direct or indirect.
In this pair of definitions, the home or base
country of the currencies being discussed is
critical.
A direct quote is a home currency price of a
unit of foreign currency.

24. Method of Quotation
An indirect quote is a foreign currency price of
a unit of home currency.
The form of the quote depends on what the
speaker regard as “home.”

25. Method of Quotation
Interbank quotations are given as a bid and
ask (also referred to as offer).
A bid is the price (i.e. exchange rate) in one
currency at which a dealer will buy another
currency.

26. Method of Quotation
An ask is the price (i.e. exchange rate) at
which a dealer will sell the other currency.
Dealers bid (buy) at one price and ask (sell)
at a slightly higher price, making their profit
from the spread between the buying and
selling prices.
A bid for one currency is also the offer for the
opposite currency.

27. Method of Quotation
The difference between the bid rate and the
offer is the dealer’s spread.
This one of the potential sources of profit for
dealers
NB: The smaller rate is termed the bid rate
and the higher is called the offer, or ask
rate.

28. Method of Quotation
The size of the bid/offer spread varies
according to the depth of the market and its
stability at any particular time
Depth of a market refers to the volume of
transactions in any particular currency
Deep markets refer to currencies that are
widely traded.
Deep markets have more deals
Shallow markets have fewer deals

29. Method of Quotation
If US dollars are quoted in terms of sterling
as $1.6050 to $1.6060,
it means that the dealer is prepared to buy pounds
at the rate of $1.6050 or
Sell pounds at $1.6060
 In this case, the spread is equal to $0.0010 or 10
points (or pip) is the last significant figure in the
quotation.

30. Method of Quotation
Forward rates are typically quoted in terms of
points.
A forward quotation is expressed in points is
not a foreign exchange rate as such.
Rather, it is the difference between the
forward rate and the spot rate.

31. Quiz
• The foreign exchange market is the largest
market on earth. True or false?
• The foreign exchange market is a twenty-four
hour market. True or false?
• An offshore dollar is a dollar deposited in a
bank outside the United States. True or false?

32. Lecture 2………..