Unit VIII- customs union and regional groupings

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Unit VII: Foreign Exchange (FX) – Concept, Systems, and Markets : 

Unit VII: Foreign Exchange (FX) – Concept, Systems, and Markets Day and Date:

Unit Highlights… : 

Unit Highlights… Foreign exchange rate concept Exchange rate systems fixed flexible Exchange control Foreign exchange markets

Text book reference chapters… : 

Text book reference chapters… International Economics by Dominick Salvatore – Chapters 14,15 & 20 International Economics by Francis Cherunilam – Chapter 18

Foreign exchange rate…concept : 

Foreign exchange rate…concept Value of currency in terms of another.

Foreign exchange rate concept : 

Foreign exchange rate concept Spot exchange rate is the current exchange rate. Forward exchange rate is the rate which is quoted and traded today but for delivery and payment on a specific future date.

Foreign exchange rate concept : 

Foreign exchange rate concept Currency Quotations, Price and Unit currency Direct and Indirect Quote

Foreign exchange rate….Currency movements : 

Foreign exchange rate….Currency movements Appreciation/currency strengthening Depreciation/currency weakening

Factors affecting FX rate : 

Factors affecting FX rate Economic – Government budget, BOT, inflation, economic growth Political conditions Psychological – Investor pessimism/optimism

Exchange Rate Systems : 

Exchange Rate Systems Free/Flexible Pegged/Fixed

Exchange Control : 

Exchange Control Controls imposed by government on the purchase/sale of foreign currencies within the domestic economy such as, Ban/restrictions on possession and use of foreign currency within the country Restricting currency exchange to government-approved exchangers Fixed exchange rates Restrictions on the amount of currency that may be imported or exported

Foreign Exchange Transactions : 

Foreign Exchange Transactions Swaps Futures Options

Foreign Exchange Transactions…Swaps : 

Foreign Exchange Transactions…Swaps SPOT SALE of a currency combined with a FUTURE REPURCHASE of the same currency.

Foreign Exchange Transactions… Futures : 

Foreign Exchange Transactions… Futures FORWARD CONTRACT for STANDARDIZED CURRENCY AMOUNTS and SELECTED CALENDAR DATES traded on an organized market. STANDARDIZED CURRENCY - ¥,£,C$,€, Australian Dollar, Swiss Franc, Mexican Peso SELECTED CALENDAR DATES - 4 dates; 3rd Wednesday in March, June, September, and December)

Foreign Exchange Transactions…Options : 

Foreign Exchange Transactions…Options A contract giving the purchaser a right but not an obligation to BUY OR SELL a standard amount of a traded currency on a STATED /BEFORE A STATED DATE and a stated price. Buy – Call option; Sell – Put option Stated date – European option; Before a stated date – American option

Foreign Exchange Markets : 

Foreign Exchange Markets Market where foreign currencies are traded 24x7 market Global market Large volume of transactions Two tier market: First tier: ultimate customer and banker Second tier: between banks Participants include large banks, central banks, currency speculators, multinational corporations, governments, and other financial institutions.

To conclude… : 

To conclude… The need to understand FX concepts and market arises from an ever increasing integration of economies resulting in cross-border movements of commodities, capital, resources, and people.

You should now be able to understand, : 

You should now be able to understand, What is FX rate? What are FX markets? In what ways are they unique? What are fixed and flexible exchange systems?

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