Module 1
The Role of Global Capital
Markets
The Foreign Exchange Market
(No company is an island…)
Presenter: Paul Kofman
Going global
Most companies are exposed
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to changes in exchange rates
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• Exports of goods
• Imports of inputs
• Overseas operations/assets
• Overseas liabilities
…
• Overseas competition.
1
Where’s the market?
An Over-The-Counter (OTC) wholesale dealer
market where a small number of accredited
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dealers provide real-time currency prices.
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1. Companies contact brokers.
header is used.
2. Brokers provide orders to buy/sell currencies to
dealers.
3. Dealers quote prices at which they will buy/sell.
FX market organizes trading in currencies but does
not provide financing – e.g. a loan in foreign
currency!
Is there no primary market?
The exchange rate
It’s a relative price – the value of a currency is
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expressed in terms of another currency.
sub heading length,
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header is used. USD/CNY = 6.2
Domestic/trade/base currency = USD
Foreign/terms currency = Chinese Yuan (CNY)
USD/CNY indicates 6.2 Chinese Yuan buys 1 USD.
Alternatively:
CNY/USD indicates 0.1613 USD buys 1 Chinese Yuan.
2
Changes in the exchange rate
Appreciation
If USD/CNY increases, the base currency
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(USD) increases in value, i.e. one USD buys
more CNY.
Depreciation
If USD/CNY decreases, the trade currency
(USD) decreases in value, i.e. one USD buys
less CNY.
Fixed, managed or floating
Some countries fix/peg the value of
their currency to another currency.
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sub heading length, • Belize Dollar against the USD
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header is used. 2 BZD = 1 USD
Others control/manage the
movements against another
currency.
• Chinese Yuan against the USD
Most let the market determine the
value = floating exchange rates.
What about the EURO?
3
FX centers
New York, Frankfurt, Tokyo, London,
Sydney – are the traditional FX markets.
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Straddling the world’s time zones for 24/7
price discovery in the world’s leading
trading currencies (USD, EURO, CNY,
JPY, GBP).
New centers emerge:
Beijing, Mumbai, Seoul, Sao Paulo.
FX trading is OTC, but online platforms
link regional markets.
Source list
Slide 2 / overlay image: Foreign Currency and Coins by Philip Brewer (
https://flic.kr/p/3bSxoU) CC BY 2.0 (
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sub heading length, https://creativecommons.org/licenses/by/2.0/)
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header is used.
Slide 6: Managed and fixed exchange rates. © University of Melbourne.
Prepared by Paul Kofman. Sourced from data obtained from
http://www.exchange-rates.org/history/CNY/USD/T
Slide 7 / overlay image: Skyscrapers against sky in downtown Seattle 2 by D
Coetzee [CC0/Public domain] (https://flic.kr/p/6DY3WA)
Additional overlay images / video sourced from: ©iStock.com/Igor Krasnov;
©iStock.com/travellinglight; ©iStock.com/VukasS.
