FOREIGN EXCHANGE MARKET ~customers of commercial and >Method of Quotation

central banks
INTRODUCTION -For Interbank dollar trades
-Forward Market
#The Currency Market: ~American terms
~Arbitrageurs
>where money dominated as one ~European terms
currency is bought and sold with ~Traders
-For Nonbank customers:
money denominated in another
~hedgers
currency. Direct Quote
~speculators
#International Trade and Capital -gives the home currency price of
Transactions #CLEARING SYSTEMS one unit of foreign currency.
>facilitated with the ability to transfer >Clearing House Interbank Payment >Transaction Costs
purchasing power between countries.
System(CHIPS) -Bid-Ask Spread
#Location
-Used in U.S. for Electronic fund ~used to calculate the fee charged by
1. OTC-Type: no specific location Transfers the bank
2. Most trade by phone, telex, SWIFT >FedWire BID: the price at which the bank is
willing to buy
(Society for Worldwide Interbank -operated by the fed
Financial Telecommunication) ASK: the price it will sell the currency
-used for domestic transfers
>Precent Spread Formula (PS):
#Electronic Trading
-ORGANIZATION OF THE FOREIGN
EXCHANGE MARKET- >Automated Trading Ask  Bid
PS  100
-genuine screen-based market Ask

#Participants in the Foreign Exchange > Results:

>Participants at 2 levels -Reduces cost of trading

>Cross Rates
- Wholesale Level (95%) -Threatens traders’ oligopoly of
information -The Exchange rate between 2
~Major Banks non-US$ Currencies.
-Provides Liquidity
- Retail Level >Currency Arbitrage
~Business Customers -If cross rates differ from one financial
# Size of The Market
center to another, and profit
(Refer to PPT slide 15) opportunities exist.
>Two types of Currency markets
-Buy cheap in one int’l market, sell at a
-Spot Market higher price in another
-THE SPOT MARKET-
~immediate transaction -Role of Available Information

~recorded by 2nd business day >Settlement Date Value Date

#Spot Quotations
-Forward Market -Date monies are due
>Sources
~transactions take place at a -2nd Working day after date of original
specified future date -All Major Newspapers transaction
-Major currencies have four different >Exchange Risk
quotes:
>Participants by Market -bankers= middlemen
~spot price
-Spot Market ~incurring risk of adverse
~30-Day exchange rate moves.
~Commercial Banks
~90-Day ~increased uncertainty about
~Brokers
future exchange rate requires
~180-Day
#SPOT MARKET -Investors are almost always
risk-averse.
1. Demand for higher risk premium F= Forward rate of exchange
>The Time Value of Money:
2. Bankers widen bid-ask spread S= Spot rate of exchange
-Everyone agrees on the basic
>Mechanics of Spot Transaction n= Number of Months in th Forward
principle
Contract
1. Currency transaction:
>The Importance of Cash Flows:
#Forward Contract Maturities
Verbal agreement, U.S.
-Most Investment research deals with
>Contract Terms
importer specifies: predicting future corporate earnings.
-30-Day
-Account to debit(his accnt) >The Tax Factor:
-90-Day
-Account to credit(exporter) -The tax code is complicated and not
-180-Day all investments are taxed equally
2. Bank send importer contract note
including: -360-Day >Economy, Industry and Company (EIC)
analysis:
-amount of foreign currency >Long-term Contracts
-The analysts first considers conditions
-agreed exchange rate in the overall economy (market risk)
-confirmation of step 1 -INTEREST RATE PARITY THEORY- -Then determines which industries are
the most attractive in light of the
3. Settlement (Refer to PPT Slide36-41)
economic conditions (using Porter’s
-Correspondent bank in HK competitive strategy analysis
transfers HK$ from nostro accnt framework, for example)
to exporter’s value date
-Finally, identifies the most attractive
FUNDAMENTAL STOCK ANALYSIS companies within the attractive
#Fundamental Analysts industries.
-THE FORWARD MARKET-
-believe securities are priced
according to fundamental economic
#Forward Contract data.

>an agreement between a bank and a -study anything that can affect the
customer to deliver a specified amount security’s value:
of currency against another currency at
-macro to micro economic factors
a specified future date and at a fixed
exchange rate. -qualitative and quantitative
factors
>Purpose of a forward:
#Technical Analysts
-Hedging: the act of reducing
Threats of
exchange rate risk -think investor behavior and supply New Entrants
and demand factors play the most
#Forward Rate Quotations
important role.
>Two Methods
Suppliers’ Rivalry Buyers’
-Outright Rate: quoted to commercial bargaining among bargaining
customers. power existing Power
#Fundamental Analysis competitor
-Swap Rate: quoted in the Interbank
market as a discount or premium -a method of measuring a security’s
Threat of
intrinsic value by examining related
>Calculating The Forward Premium or Substitute
economic and financial factors.
Discount
#Valuation Philosophies
F  S 12
  100 >Investors’ understanding of risk
S n
premiums: #VALUE vs. GROWTH Investing
 >Inter-Factors -Book values normally ignore
intangible assets’ fair value.
>The Value Approach to Investing -Industry
-Book values represent historical
-Value Investor -Customers
values. The current fair value of the
~believes that securities should be -Market Share assets may be much different from
purchased only when the underlying the balances in the balance sheet, as
-Growth of Industry explained above.
fundamentals(macroeconomic
information, industry news, and a -Competition -Future growth potential in earnings is
firm’s financial statement) justify
also not considered in the book
purchase. -Regulations
values.
>The Growth Approach to Investing #Price-earnings ratio (P.E.)
Market Pr ice
>The ratio which compares this EPS to Market / BookRatio 
>Growth investors BPS
share price is called the price-earnings #Return On Equity
~seek steadily growing ratio (PER)
>The value which compares this EPS
companies. >It is an indicator which shows how (earnings per share) and BPS (book
many times higher the share price is to value per share) is called the rate of
There are two factions:
earnings per share and a typical return on equity (ROE).
-Information trader indicator when considering undervalue
and overvalue. >This uses shareholders’ equity to show
~ are in a hurry; they how much a company has increased
Market Pr ice earnings, and a high ROE means that
believe information differentials in PER 
the marketplace can be profitably EPS the company is being managed that
exploited. pmuch more efficiently.
#Earning per share
-True growth investors EPS
> is current income divided by the total ROE %  100
number of outstanding shares. BPS
~are more willing to
#Dividend Yield
wait, but they share the belief that Income
EPS 
good investment managers can earn # OfCommonShares >The dividend yield or dividend-price
above-average returns for their ratio of a share is the dividend per
clients. #Book value per share share, divided by the price per share. It
is also a company's total annual
#Intrinsic Value >net assets* divided by the total
dividend payments divided by its
number of outstanding shares.
>Financial analysts believe that the market capitalization, assuming the
stock price of does not reflect its true NetIncome number of shares is constant.
value. BPS 
# OfOuts tan dingShares CDY (%) 
Most Recent Full - Year Dividend
100
Current Share Price
>Fundamental analysis assists in
#Price-to-book Value Ratio
estimating the intrinsic value of
stocks >The value which compares this
number to share price is called the
#Qualitative factors
price-to-book value ratio (PBR).
>Intra-Factors
> A price-to-book value ratio under 1
-Intangibles of the Company means the share price is lower than
the dissolution value on the books.
-Business Model
>A P/B ratio of less than 1.0 can
-Competitive Advantage indicate that a stock is undervalued,
-Management of the Company while a ratio of greater than 1.0 may
indicate that a stock is overvalued.
-Corporate Governance
>Below are the reasons that undercut
-Financial and Information the reliability of book values for any
major analysis:
-Transparency

-Structure of the Board of Directors