1. Value of Currency

2. Table of Contents

Forex Market

Factors / Affects

Floating vs. Fixed (Int'l Pegs)

China

Euro

Etc

3. Forex Market

Largest market in the world

• Perfect competition

$3.98 trillion traded daily

• 1.490 in spot transactions

• $475 billion in outright forwards

• 1.765 trillion in foreign exchange swaps

• $43 billion currency swaps

• 207 billion in options and other products

4. Where

Global system, no central place where it is exchanged / clearing house

• $1.85 trillion (37%) of trades occur in London (IMF stats)

• New York City = 17.9%

• Tokyo = 6.2%

• Futures are traded on the Chicago Mercantile Exchange / (RMB)

• Korea, South Africa, India all have their currency traded on their own exchanges

Banks will exchange currency for you

5. Who

Inter-bank = 53% of all transactions

• Can see demand before others

• See next slide

Central Banks

• Control supply

Multi-National Corp's

Hedge funds

6. Top 10 currency traders (% of overall volume, May, 2010)

Deutsche Bank 18.06%

UBS AG 11.30%

Barclays Capital 11.08%

Citi 7.69%

Royal Bank of Scotland 6.50%

JPMorgan Chase 6.35%

HSBC 4.55%

Creidt Suisse

Goldman Sachs 4.28%

Morgan Stanley 2.91%

7. Factors

Governance

Economic policies

Monetary policies

Legal system

Defense force

Commercial policies

Education

Industrial policies

Accounting principles

Banking policies

Law enforcement

Transportation policies

Agricultural policies

Backed by the sum total of the underlying value systems in an economy 8. What affects a currency

Basic Macroeconomic conditions

• Monetary flows caused by changes in GDP growth

• Inflation

• Interest rates

• Budget and trade deficits / surpluses

• Media

9. Fixed vs. Floating

Reasons for fixing:

• Short-term economic stability

• Control Inflation

• Trade more predictable (small/export countries)

Reasons for floating:

• Belief in free market policy

• Gives real time value of the system you are buying into

10. Who Pegs to Who?

Dark green: USD / Light green: Currencies pegged to USD

Dark Blue: Eurozone users / Light Blue: Currencies pegged to Euro

11. Countries who Peg their currency to the USD Hong Kong dollar(narrow band) Jordanian dinar Lebanese pound Maldivian rufiyaa Netherlands Antillean gulden Omani rial Panamanian balboa(at par) Qatari riyal Saudi riyal Trinidad and Tobago dollar United Arab Emirates dirham Venezuelan bolvar Aruban florin Bahamian dollar (at par) Bahraini dinar Barbadian dollar Belize dollar Bermudian dollar (at par) Cayman Islands dollar Cuban convertible peso Djiboutian franc East Caribbean dollar Eritrean nakfa 12. How they do it

Buying and selling their own currency on an open market (why they maintain reserves)

Make it illegal to trade = black market

US Fed determines its interest rate & money supply

13. China: Basic Things to Know

Renminbi & Chinese Yuan:

• Same as Sterling and Pound

• • Yuan(CNY) is the unit of account (Pound)

• • Renminbi(RMB) is the actual currency (Sterling)

• Futures are traded on the Chicago Mercantile Exchange (RMB)

14. USDCNY Peg was lifted Financial Crisis hit (Safe Haven) 15. China: Pegged to Basket

Trade Surplus

Receive interest payments in USD

Managed float = Unknown Basket

• USD (mostly)

• Euro

• South Korean Won

• Japanese Yen

16. Euro

2 ndlargest reserve currency

2 ndmost traded currency in the world

EURUSD 27% of Spot currency market

PIIGS

Short-term: Would be better off if they werent on the Euro. Cant devalue currency to stimulate economy.

17. Etc

Currency War = Same idea as price war between companies

Purchasing power parity = balancing act between domestic and int'l needs