Page 41 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all
important centers as well. Banks throughout the world participate. Currency trading happens
continuously throughout the day; as the Asian trading session ends, the European session begins,
followed by the North American session and then back to the Asian session, excluding weekends.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual
product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter
code of the Currency into which the price of one unit of XXX is expressed (called base Currency).
For instance, EUR/USD is the price of the Euro expressed in US dollars, as in 1 Euro = 1.5465
dollar. Out of convention, the first Currency in the pair, the base Currency, was the stronger
Currency at the creation of the pair. The second Currency, counter Currency, was the weaker
Currency at the creation of the pair.

Notes The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes
positive Currency correlation between XXX/YYY and XXX/ZZZ.

On the Spot Market, according to the BIS study, the most heavily traded products were:

EUR/USD: 27%
USD/JPY: 13%
GBP/USD (also called sterling or cable): 12%

Did u know? Trading in the Euro has grown considerably since the currency’s creation in
January 1999. As of now the Foreign Exchange Market is dollar-centered.

3.1.1 Information and Communication Systems

Communications, pertaining to international financial transactions, are handled mainly by a
large network called Society for Worldwide Interbank Financial Telecommunications (SWIFT).
This is a non-profit Belgian cooperative with main and regional centres around the world
connected by data transmission lines. Depending on the location, a bank can access a regional
processor or main centre which then transmits the information to the appropriate location. This
computer based communications system links banks and brokers in every financial centre. The
banks and brokers are in almost instant contact, with activity in some financial centre or other
24 hours a day. Because of the speed of communications, significant events have almost
instantaneous impact despite huge distances separating market participants.

3.1.2 Functions of the Foreign Exchange Market

The Foreign Exchange Market is the market in which individuals firms and banks buy and sell
foreign currencies or foreign exchange. Every country has its own Currency which is used to
quote the price of goods and services. For example dollar is used in the United States of America;
pound is used in the United Kingdom, yen in the Japan and Euro in the European member
countries.
The principle function of the Foreign Exchange Market is the transfer of funds from one nation
and Currency to another. Transfer of purchasing power is necessary because international trade
and capital transactions usually involve parties living in countries with different national
currencies. Each party wants to trade and deal in his own Currency but since the trade can be

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