1 FM
1 FM
1 FM
MARKET
• The foreign exchange market is the "place"
where currencies are traded.
• Currencies need to be exchanged for
conducting foreign trade and business.
• Most liquid financial market in world.
• No central marketplace for foreign exchange.
• Currency trading conducted electronically
over-the-counter (OTC).
• Open 24 hours a day
TYPES OF MARKETS
EXCHANGE RATE REGIMES
Demand Supply Curve
Purchasing power parity
TERMINOLOGIES
The Law of One Price
• A commodity will have the same price in terms of
common currency in every country
– In the absence of frictions (e.g. shipping costs, tariffs,..)
– Example
Price of wheat in France (per bushel): P€
Price of wheat in U.S. (per bushel): P$
S€/$ = spot exchange rate
P€ = s€/$ P$
• Example:
Price of wheat in France per bushel (p€) = 3.45 €
Price of wheat in U.S. per bushel (p$) = $4.15
S€/$ = 0.83215 (s$/€ = 1.2017)
S€/$ = P€ / PUS
FORWARD
MARKET
Example of a forward market
transaction
• Suppose you will need 100,000€ in one year
• Generally, it holds
(1 + rNominal) = (1 + rReal)(1 + i )
(1 + rReal) = (1 + rNominal) / (1 + i )
Example of
capital market equilibrium
• Fisher condition in U.S. and France:
(1 + r$(Real)) = (1 + r$) / (1 + i$)
(1 + r€(Real)) = (1 + r€) / (1 + i€)