Int finance lect 1

why are exchange rates important

International Trade
Investment opportunities to global financial markets
Investments to economies abroad (FDIs, productive investments)
fiscal stance of national economies

spot forex market

when a transaction is agreed between two parties and the payment of
the one currency and delivery of the other takes place on the same day

forward forex market

when a transaction is agreed today between two parties and the
payment and delivery of the currency takes place at some agreed time in the future

base currency

the currency the value of which is expressed in units of
“quote currency

Bid

FI/Bank (buy)

clients (sell)

ASK

FI/Bank (sell)

clients (buy)

foreign exchange cross rate

all exchange rates in the wholesale market quoted
against USD (called primary rates)

law of one price

In frictionless markets, two securities/assets that have equal cash flows must have the same price

arbitrage + shopping around.

generate an excess supply of the overpriced asset and an excess demand
for the underpriced asset, moving the prices of these two assets toward
each other

Arbitrage

an asset (in this case a currency) be bought relatively cheaper and immediately after be sold at a higher price. short time period. no need for captial to trade

shopping around

one way arbitrage, either buying at cheaper rate or selling at higher rate. only works if investors willing to complete transaction

synthetic bid

go thru another currency to get what you want

synth bid = arb??

If the direct and synthetic ask and bid rate differs, this might create opportunities to possible arbitrage and shopping around