Professional Documents
Culture Documents
CURRENCY MARKETS
Topic 1
THE STRUCTURE OF THE
INTERNATIONAL FINANCIAL SYSTEM
Agenda
1.
2.
3.
Implications:
Growing integration of financial markets, including emerging markets
Better financing of current account deficits
Financial contagion risks
system
efficiently
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11
14
Banks that accept deposits and make loans in the Eurocurrency market
are called Eurobanks
Eurobanks can offer narrower spreads than domestic banks (the spread is the
difference between the deposit and loan interest rates)
15
Swiss
EUROCURRENCY MARKET
Market
Domestic
Euro-Swiss Franc
Eurodollar
Market
Market
Euro-Yen
Market
Japanese
Domestic
Market
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USD
Onshore (USA)
GBP
Deposit in euro-USD
Bonds in euro-USD
Deposit in euro-GBP
Bonds in euro-GBP
Regulatory
dimension
Offshore (Abroad)
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LIBOR
average interbank interest rate at which a selection of banks on the London money
market are prepared to lend to one another
the official LIBOR interest rates are announced once per working day at around
11:45 a.m. (London time) by the British Bankers' Association (BBA)
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19
British banks began to offer higher interest rates for US dollars deposits
21
Types of markets
Primary markets: stocks are bought from the company that
issues them
Secondary markets: shares previously issued can be traded
among investors OTC versus stock exchanges
Demand
shift from the prevalence of individual to the dominance of institutional
investors (pension, mutual and insurance funds, institutional traders hedge
funds and investment banks)
search for better investment opportunities and international diversification of
holdings interest in trading without the cost of becoming members in
different national stock exchanges and following domestic rules on trading
Technology
Regulation
Markets have been gradually opened to non-residents for trading
Success story: European Union
23
Norex alliance among the Nordic and Baltic exchanges in Denmark, Estonia,
Finland, Latvia, Lithuania, Sweden (all owned and operated by OMX, the largest
integrated securities market in Northern Europe), Iceland, and Norway
26
The value of share trading rose in 2014 10% worldwide to 29.7 trillion USD
from the second half of 2013 (+6.8% yoy)
The number of trades rose in 2014 10% from the second-half of 2013 (+12%
yoy); the average value of trades decreased
A continuing strong performance of equity markets global market
capitalisation rose 6% to 68,7 trillion USD from the second-half of 2013 (+21%
yoy.)
Good performance of IPO markets and investment flows the number of
IPOs fell 11% compared to the second half of 2013 but increased 42% yoy
Total investment flows in USD increased 17% compared to the second-half of
2013(+11% yoy.)
Exchange Traded Derivatives (ETD) volumes were stable the total
number of contracts traded decreased 0.2% from the second-half of 2013 (-13%
yoy.)
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29
30
31
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FOREX provides:
the physical and institutional structure through which the money of
completed
Foreign exchange means the money of a foreign country; that is, foreign
currency bank balances, banknotes, checks and drafts.
A foreign exchange transaction is an agreement between a buyer and a
seller that a fixed amount of one currency will be delivered for some other
currency at a specified date.
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Organization of FOREX
The first global 24-hour market in the world and by far the largest
OTC market 2 tiers:
Wholesale tier liquid inter-bank market
historically, it accounted for 60 to 70% of transactions
2013: trading between dealers in the interbank market dropped
to 39%
there are FX brokers who match buy and sell orders but do not
carry inventory and FX specialists (dealers)
there are corresponding banking relationships that facilitate the
functioning of the market
Market structure
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36
FOREX rythms
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FOREX Participants
FX brokers
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Banks and a few nonbank foreign exchange dealers operate in both the interbank and
client markets.
The profit from buying foreign exchange at a bid price and reselling it at a slightly
higher offer or ask price.
Dealers in the foreign exchange department of large international banks often function
as market makers.
These dealers stand willing at all times to buy and sell those currencies in which they
specialize and thus maintain an inventory position in those currencies.
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40
Some of the participants use the market to hedge foreign exchange risk.
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Speculators and arbitragers seek to profit from trading in the market itself.
While dealers seek the bid/ask spread, speculators seek all the profit
from exchange rate changes and arbitragers try to profit from
simultaneous exchange rate differences in different markets.
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43
45
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maturities: 30, 90, 180, 270, and 360 days, and up to ten
years
FX swap transactions
involve
Source: BIS - 2013 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity
48
Currency distribution
Source: BIS - 2013 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity
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Counterparty distribution
Source: BIS - 2013 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity
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Source: BIS - 2013 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity
51
Currency terminology
Main components:
a number of public institutions multilateral institutions (IMF, World Bank,
etc...) and central banks
specific financial markets foreign exchange markets and eurocurrency
markets
certain international agreements or rules of the game
Since the end of the second world war, and the signing of the
Bretton-Woods Agreement, all three components of the IMS
have experienced major changes:
The institutions such as the IMF and the World Bank have seen their
Alternative systems:
Managed/dirty float
Target zones
Crawling-peg
No national currency (dollarization)
Free Float
Fixed-Rate System
Managed Float
Source: IMF
Target zones
Crawling-peg
The exchange rate fluctuates within a band around a parity, but is periodically
adjusted, typically depending on the inflation differential between the two
currencies
Currency mini-devaluations happen rather frequently, sometimes even daily,
and are announced by the monetary authority
Devaluations purpose is to maintain the economys competitiveness
Usually implemented by emerging markets with hyperinflationary
environments
Example: Mexican peso, 1990-1994
Crawling-peg: example
The present monetary system has its roots in the gold exchange
standard or Bretton-Woods system which existed from 1944-1971
Bretton-Woods objectives:
stable exchange rates a fixed exchange rate regime 1%
band of fluctuation
elimination of exchange controls
return to free convertibility of currencies
Jamaica
Agreemen
t
Louvre
Accord
Plaza
Accord
Currency arrangements
major objectives:
zone of monetary stability in Europe
coordinating exchange rate policies towards non-EMS countries
paving the way for the eventual European monetary union
two main instruments:
1. European Currency Unit (ECU)
2. Exchange Rate Mechanism (ERM)
Four small states have been given a formal right to use the euro: Andorra, Monaco, San
Marino, Vatican City
Two non-EU countries use euro unilaterally: Montenegro and Kosovo
Joined ERM II
Rate and
fluctuation band
Devaluations/
Revaluations
Adopted Euro
Danish kroner
1 Jan 1999
7.46038; 2.25%
NO
Greek
drahma
1 Jan 1999
353.109; 15%
Estonia
28 June 2004
15.6466; 15%
Lithuania
28 June 2004
3.45280; 15%
Slovenia
28 June 2004
239.640; 15%
Cyprus
2 May 2005
0.585274; 15%
Latvia
2 May 2005
Malta
2 May 2005
0.429300; 15%
Slovakia
28 November
2005
38.4550; 15%
19 March 2007:
revalued to 35.4424
29 May 2008:
revalued to 30.1260
good harvest & oversupply for some fruit and vegetables due to the import ban
imposed by Russia
decline in global commodity prices
rate
Inflation-targeting framework for monetary policy, to which
exchange rate developments must be clearly subordinated
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Convergence criteria
What is
measured:
Price stability
Sound public
finances
Sustainable
public finances
Durability of
convergence
How it is
measured:
Consumer price
inflation rate
Government
deficit as % of
GDP
Government debt
as % of GDP
Long-term
interest rate
Convergence
criteria:
Convergence criteria
According to the Treaty, at least once every two years, or at the request
of a Member State with a derogation, the Commission and the European
Central Bank assess the progress made by the euro-area candidate
countries and publish their conclusions in respective convergence reports