Mul na onal Business Finance Exam 1
Foreign exchange market - 1. allows for the exchange of one currency for another.
2. Exchange rate specifies the rate at which one currency can be exchanged for another.
Gold Standard - Each currency was conver ble into gold at a specified rate. When World War I began
in 1914, the gold standard was suspended.
Agreements on Fixed Exchange Rates - a. Bre on Woods Agreement
b. Smithsonian Agreement
Floa ng Exchange Rate System - Widely traded currencies were allowed to fluctuate in accordance
with market forces.
Over-the-counter market - The telecommunica ons network where companies normally exchange one
currency for another.
Foreign exchange dealers - Serve as intermediaries in the foreign exchange market.
Spot market - A foreign exchange transac on for immediate exchange.
-USD is the commonly accepted medium of exchange.
Spot rate - The exchange rate in the spot market.
Interbank market - Trading between banks.
Spot market me zones - Foreign exchange trading is conducted only during normal business hours in
a given loca on. Thus, at any given me on a weekday, somewhere around the world a bank is open
and ready to accommodate foreign exchange requests.
, Spot market liquidity - More buyers and sellers means more liquidity.
A ributes of banks that provide foreign exchange - 1. compe veness of quote
2. special rela onship with the bank
3. speed of execu on
4. advice about current market condi ons
5. forecas ng advice
Foreign exchange quota ons - 1. at any given point in me, a bank's bid (buy) quote for a foreign
currency will be less than its ask (sell) quote.
2. The bid/ask spread covers the bank's cost of conduc ng foreign exchange transac ons.
Bid/Ask Spread - (ask rate - bid rate) / ask rate
Factors that affect the spread - Order costs, inventory costs, compe on, volume, currency risk
Order costs - Costs of processing orders, including clearing costs and the costs of recording
transac ons.
Inventory costs - Costs of maintaining an inventory of a par cular currency.
Compe on - The more intense the compe on, the smaller the spread quoted by intermediaries
Volume - Currencies that have a large trading volume are more liquid because there are numerous
buyers and sellers at any given me.
Currency risk - Economic or poli cal condi ons that cause the demand for and supply of the currency
to change abruptly.
Foreign exchange market - 1. allows for the exchange of one currency for another.
2. Exchange rate specifies the rate at which one currency can be exchanged for another.
Gold Standard - Each currency was conver ble into gold at a specified rate. When World War I began
in 1914, the gold standard was suspended.
Agreements on Fixed Exchange Rates - a. Bre on Woods Agreement
b. Smithsonian Agreement
Floa ng Exchange Rate System - Widely traded currencies were allowed to fluctuate in accordance
with market forces.
Over-the-counter market - The telecommunica ons network where companies normally exchange one
currency for another.
Foreign exchange dealers - Serve as intermediaries in the foreign exchange market.
Spot market - A foreign exchange transac on for immediate exchange.
-USD is the commonly accepted medium of exchange.
Spot rate - The exchange rate in the spot market.
Interbank market - Trading between banks.
Spot market me zones - Foreign exchange trading is conducted only during normal business hours in
a given loca on. Thus, at any given me on a weekday, somewhere around the world a bank is open
and ready to accommodate foreign exchange requests.
, Spot market liquidity - More buyers and sellers means more liquidity.
A ributes of banks that provide foreign exchange - 1. compe veness of quote
2. special rela onship with the bank
3. speed of execu on
4. advice about current market condi ons
5. forecas ng advice
Foreign exchange quota ons - 1. at any given point in me, a bank's bid (buy) quote for a foreign
currency will be less than its ask (sell) quote.
2. The bid/ask spread covers the bank's cost of conduc ng foreign exchange transac ons.
Bid/Ask Spread - (ask rate - bid rate) / ask rate
Factors that affect the spread - Order costs, inventory costs, compe on, volume, currency risk
Order costs - Costs of processing orders, including clearing costs and the costs of recording
transac ons.
Inventory costs - Costs of maintaining an inventory of a par cular currency.
Compe on - The more intense the compe on, the smaller the spread quoted by intermediaries
Volume - Currencies that have a large trading volume are more liquid because there are numerous
buyers and sellers at any given me.
Currency risk - Economic or poli cal condi ons that cause the demand for and supply of the currency
to change abruptly.
