Starter: Focus Group: Options Video

Starter: Focus Group
Options Video
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Fundamentals of Financial Services
Foreign Exchange
Chapter 7.2.1
Key Topic Areas
1. Characteristics of the foreign exchange

market
2. Currency trading
3. Exchange rates
Lesson Objectives
By the end of the lesson:
• Everyone MUST know:

– The basic characteristics of the foreign exchange
market
– Currency trading
– Exchange rates
Foreign Exchange…
Changing a particular quantity of one currency for another currency
We mainly know The US dollar is regarded as the

of exchanging most important currency in the
currencies when world and it is typical for foreign
we go on holiday exchange rates to be quoted
against the US$.
Foreign exchange
activity is much
larger for Banks and their dealers
businesses who offer services to clients
buy and sell arising from international
things across trade and travel with fees
borders earned as a result.
Daily foreign exchange
activity exceeds $5
trillion
Currency Quotes
Trading of foreign currencies clearly involves selling one currency and
buying another, the two currencies involved are described as ‘pairs’.
Price at which a pair is bought and sold

Base Currency is the exchange rate Counter or Quote
Currency
The first currency
quoted in a pair The second
It is always equal 1 : 0.75 currency quoted

in a pair
to one unit of
that currency In this case $1 is worth £0.75
When the exchange rate is being
quoted, the name of the each
currency is abbreviated to a three letter
reference
Most commonly quoted currency pairs:

Currency quotes
When currency pairs are quoted, the foreign exchange
trader will quote a bid and ask price:
1.1164/66
When quoting, the base In this case:
currency is not mentioned
as the convention is that If a client wants to buy £100,000 he will
the base currency is need to pay the higher of the two prices
always 1 ($1.1166) and deliver $111,660
If a client wants to sell £100,000 he will need

to pay the lower of the two prices ($1.1164)
and receives $111,640
Currency Trading
The forex market is primarily an over-the-
counter (OTC) market, where brokers and
dealers negotiate directly with each other.
London has grown to become the world’s
largest forex market due to it’s ideal location
between the Asian and American time zones
Continually provide the market with both bid

(buy) and ask (sell) prices
Use the market to try to control money

supply, inflation and interest rates.
Individual forex traders (i.e. retail investors)

are becoming increasingly important in the
global forex market.
Exchange Rate Activity
Complete the table…
ISO 4217 Currency Codes Country Name of currency Symbol £1 = ?
AUD
GBP
CAD
CNY
DKK
EUR
HKD
INR
JPY
RUB
CHF
ZAR
SEK
USD
Exchange Rate Activity
Complete the table…
ISO 4217 Currency Codes Country Name of currency Symbol £1 = ?
AUD Australia Australian Dollar
GBP Great Britain British Pound
Canada Canadian Dollar

CAD
CNY China Chinese Yuan
DKK Denmark Danish Krone
EUR Eurozone Euro
HKD Hong Kong Hong Kong Dollar
INR India Indian Rupee
JPY Japan Japanese Yen
RUB Russia Russian Rouble
CHF Switzerland Swiss Franc
ZAR South Africa South African Rand
SEK Sweden Swedish Krona
USD United States United States Dollar

Case Study: Usain
Usain is visiting London for a short break. He

is normally based in the US, so all of his
money is in US dollars. He knows he will
need some UK sterling to pay for taxis,
buses, food and entertainment. He draws a
lot of US dollars out of his US bank and sells
them for UK sterling at the foreign exchange
dealer’s kiosk at the airport.
This means Usain has entered into a

currency trade.
Case Study: Usain
The amount of UK sterling that Usain receives at the kiosk will be
determined by the prevailing exchange rate between US dollars and UK
sterling. The quoted rates might be as follows:
Dollars per Pound 1.54 – 1.64

Pounds per Dollar 0.61 – 0.65
There are two sets of quotes:

• The first quote is the number of US dollars per pound.
• The second quote is the number of UK pounds per dollar.
Which of the two rates will be highlighted by the kiosk assistant for Usain?
Case Study: Usain
Which of the two rates will be highlighted by the kiosk assistant for Usain?
The relevant rate for Usain is the number of UK pounds per US dollar, since he is
SELLING DOLLARS FOR UK POUNDS, so the 0.61 – 0.65 is the quote that will be
highlighted.
Each quote is made up of two figures, a lower figure on the left and a higher figure
on the right.
The relevant side depends on whether the client at the kiosk is buying or selling the
particular currency.
Case Study: Usain
How many pounds will Usain get, assuming he is selling $1,000?

Case Study: Usain
Usain’s holiday break in the UK is now over and he still has £100 in cash.
Assuming that the quote at the kiosk is still the same, how many US dollars
can Usain expect?
Flipping an exchange rate quote
EUROs per £ 1.245 – 1.255
A foreign exchange dealer is quoting the following rate for the number of
euros per UK pounds.
The foreign exchange dealer’s quote of euros per UK pound needs to be flipped to
provide the number of UK pounds per euro.
£s per EUR: 1/1.255 = 0.797 – 1/1.245 = 0.803
So the quoted would be £s per EUR: 0.797 – 0.803

Currency Jargon
Sell rate
• This is the rate at which we sell foreign currency in
exchange of local currency. For example, if you were
heading to Europe, you would exchange British
pounds for Euros at the sell rate.
Buy rate
• This is the rate at which we can buy foreign currency
back from you into your local currency. For example
if you were returning from America, we could
exchange your US Dollars back into British pounds at
the buy rate of the day.
Plenary
• Have you met the

learning objectives?
Testimonials
• http://www.cisi.org/cisiweb2/cisi-website/schools-
colleges-universities/schools-colleges

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Starter: Focus Group

1. Characteristics of the foreign exchange

By the end of the lesson:

• Everyone MUST know:

We mainly know The US dollar is regarded as the

Price at which a pair is bought and sold

It is always equal 1 : 0.75 currency quoted

Most commonly quoted currency pairs:

If a client wants to sell £100,000 he will need

Continually provide the market with both bid

Use the market to try to control money

Individual forex traders (i.e. retail investors)

GBP Great Britain British Pound

Canada Canadian Dollar

DKK Denmark Danish Krone

EUR Eurozone Euro

HKD Hong Kong Hong Kong Dollar

INR India Indian Rupee

JPY Japan Japanese Yen

RUB Russia Russian Rouble

CHF Switzerland Swiss Franc

ZAR South Africa South African Rand

SEK Sweden Swedish Krona

USD United States United States Dollar

Usain is visiting London for a short break. He

This means Usain has entered into a

Dollars per Pound 1.54 – 1.64

There are two sets of quotes:

How many pounds will Usain get, assuming he is selling $1,000?

£s per EUR: 1/1.255 = 0.797 – 1/1.245 = 0.803

So the quoted would be £s per EUR: 0.797 – 0.803

• Have you met the

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