1. Forward Market
1.1. Involves contracting today for the future purchase or sale of foreign exchange.
1.2. Forward rate Quotation
1.2.1. S($/SFr)= 1.0018 F1($/SFr)= 1.0047 F3($/SFr)= 1.0104 F6($/SFr)=1.0193
1.2.1.1. SFr is tradind at a preminum to $ and $ is depreciate, less valuable to SFr
1.2.2. Forward Preminum
1.2.2.1. ( forward rate - spot rate) / Spot rate * 360 / days contract
1.2.3. Forward Cross-Exchange Rates
1.2.3.1. Fn( j/k)= Fn($/k)/ Fn($/j)
1.2.3.2. Fn(j/k)=Fn (j/$)/Fn(k/$)
1.2.4. Swap Transactions
1.2.4.1. Outright forward transaction
1.2.4.1.1. an uncovered speculative position in a currency, eve thought it might be part of a currency hedge to the bank customer on the other side of the transaction
1.2.4.2. Swap transaction
1.2.4.2.1. provide a means for the bank to mitigate the currency exposure in a forward trade
2. Function and Structure of the FX Market
2.1. Over-the counter (OTC) markets: not take place in a central market but it is a worldwide linkage of BANK CURRENCY TRADERS, NONBANK DEALERS, FX BROKERS, CENTRAL BANKS.
2.2. Correspondent Banking Relationship: SWIFT
3. Spot Market
3.1. Involves almost immediate purchase or sale of foreign exchange.
3.2. Spot rate
3.2.1. direct quotations: S( $/vnd)
3.2.2. indirect quotations: S( vnd/$)
3.3. Cross-exchange rate quotation:
3.3.1. S (j/k) = S ( $/k) / S ($/j)
3.3.2. S(j/k) = S ( j/$)/ S (k/$)
3.3.3. S(j/k)= S($/k) * S(j/$)
3.4. Bid- Ask spread
3.4.1. S ask ($/ vnd) = 1/ S bid (vnd/ $)
3.4.2. S ask ( vnd/$)= 1/ S bid ($/vnd)
3.5. The cross- rate trading desk
3.5.1. Nondollar trade= currency against currency trade
3.5.2. S bid (SFr/ vnd)= S bid ($/vnd) * S bid( SFr/$)
3.5.3. S ask ( vnd/ SFr) = S ask ( vnd/$) * S ask ( $/SFr)
3.6. Triangular Arbitrage
3.6.1. To earn an arbitrage profit by trading among three currencies when the direct cross- exchange rate is not alignment with the implied cross-exchange rate.