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international transaction
• Institutional arrangements required
– Settling monetary claims with minimum
inconvenience to parties
• Foreign-exchange markets
International Monetary System
Unit
• IMF
• Salient features
• Collapse of the IMF system
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• Forward transaction
– Based on contracts, for future payment receipts
• Currency swap
– Conversion of one currency to another currency
• Distribution of foreign-exchange transactions (
Table 11.1)
Interbank Trading
• Bank transactions with each other
– Retail transactions
– Wholesale transactions
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of foreign currency
– Offer rate: Price at which the bank is willing to
sell a unit of foreign currency
– Difference between bid and offer rate:
• Size of the transaction
• Liquidity of the currencies being traded
Forward and Futures Markets
• Forward contracts:
– Made by those who will receive or make payment in
foreign exchange in the weeks or months ahead
– The New York foreign-exchange market is a spot
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country
– First column shows the maturity months of the contract
• Open: Price at which yen was first sold
• High, low, and settle columns indication of contract’s closing
prices for the day
• Change compares closing prices
• Lifetime high and low
• Open interest: Total number of contracts outstanding
Foreign-Currency Options
• Provide options holder the right to buy or
sell a fixed amount of foreign currency at a
prearranged price
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Back
Exchange-Rate Determination
Continued
– Tourists
– Investors
– Exporters
– Importers
• Effects of strengthening and weakening (
Table 11.6)
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Back
Is a Strong Dollar Always Good and
a Weak Dollar Always Bad?
• Cases for discussion
– High Sierra Sport Co., a leather-goods
manufacturer in Illinois
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– Two-point arbitrage
– Three-point (triangular) arbitrage
• Result of this activity:
– Currency exchange rates consistent throughout the
world
– Only minimal deviations due to transaction costs
Forward Market
• Currencies bought and sold now for future
delivery
– Period range from date of transaction
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