BAFI1005 Financial Markets

Aim

The aim of this topic is to explain the nature and operation of the foreign exchange market along with the main determinants of the foreign exchange value of a currency. When a resident of one country enters into an economic transaction with a resident from another country, trading in the foreign exchange markets results. The topic examines the major groups of participants and trading practices in the market, the main types of instruments traded and, how trading in foreign exchange markets establishes the value of currencies.

Learning objectives

After working through this topic you should be able to:

1. Describe the nature of the foreign exchange market

2. Read and quote foreign exchanges prices

3. Explain why the foreign exchange markets exists

4. Outline the nature of globalisation and explain the reasons for off-shore borrowing

5. Describe the role of the major players in the market

6. Calculate the spot and forward market prices and cross rates

7. Demonstrate an ability to maintain a foreign exchange trading position.

8. Explain how the interaction of supply and demand determines the foreign exchange value of a currency

9. Provide a brief history of the exchange rate systems adopted by Australia since the early 1970s, and outline the problems associated with the fixed exchange rates.

10. Explain how the following factors can affect the foreign exchange value of a currency:

w relative inflation rates and purchasing power parity

w relative economic growth rates

w relative interest rates

w commodity prices

w international speculation and investment

w expected movements in exchange rates

official intervention into the foreign exchange market.