IM-1CHAPTER5THEMARKETFORFOREIGNEXCHANGESUGGESTEDANSWERSANDSOLUTIONSTOEND-OF—CHAPTERQUESTIONSANDPROBLEMSQUESTIONS1。Giveafulldefinitionofthemarketforforeignexchange。Answer：Broadlydefined，theforeignexchange(FX)marketencompassestheconversionofpurchasingpowerfromonecurrencyintoanother,bankdepositsofforeigncurrency，theextensionofcreditdenominatedinaforeigncurrency,foreigntradefinancing,andtradinginforeigncurrencyoptionsandfuturescontracts.2。Whatisthedifferencebetweentheretailorclientmarketandthewholesaleorinterbankmarketforforeignexchange？Answer:Themarketforforeignexchangecanbeviewedasatwo-tiermarket。Onetieristhewholesaleorinterbankmarketandtheothertieristheretailorclientmarket。InternationalbanksprovidethecoreoftheFXmarket.Theystandwillingtobuyorsellforeigncurrencyfortheirownaccount。Theseinternationalbanksservetheirretailclients，corporationsorindividuals，inconductingforeigncommerceormakinginternationalinvestmentinfinancialassetsthatrequiresforeignexchange.Retailtransactionsaccountforonlyabout14percentofFXtrades.Theother86percentisinterbanktradesbetweeninternationalbanks,ornon-bankdealerslargeenoughtotransactintheinterbankmarket。3。Whoarethemarketparticipantsintheforeignexchangemarket?Answer:ThemarketparticipantsthatcomprisetheFXmarketcanbecategorizedintofivegroups：internationalbanks，bankcustomers,non—bankdealers，FXbrokers,andcentralbanks。InternationalbanksprovidethecoreoftheFXmarket。Approximately100to200banksworldwidemakeamarketinforeignexchange,i。e.,theystandwillingtobuyorsellforeigncurrencyfortheirownIM-2account.Theseinternationalbanksservetheirretailclients，thebankcustomers,inconductingforeigncommerceormakinginternationalinvestmentinfinancialassetsthatrequiresforeignexchange。Non-bankdealersarelargenon-bankfinancialinstitutions,suchasinvestmentbanks,mutualfunds，pensionfunds，andhedgefunds,whosesizeandfrequencyoftradesmakeitcost—effectivetoestablishtheirowndealingroomstotradedirectlyintheinterbankmarketfortheirforeignexchangeneeds.Mostinterbanktradesarespeculativeorarbitragetransactionswheremarketparticipantsattempttocorrectlyjudgethefuturedirectionofpricemovementsinonecurrencyversusanotherorattempttoprofitfromtemporarypricediscrepanciesincurrenciesbetweencompetingdealers。FXbrokersmatchdealerorderstobuyandsellcurrenciesforafee，butdonottakeapositionthemselves.Interbanktradersuseabrokerprimarilytodisseminateasquicklyaspossibleacurrencyquotetomanyotherdealers.Centralbankssometimesinterveneintheforeignexchangemarketinanattempttoinfluencethepriceofitscurrencyagainstthatofamajortradingpartner，oracountrythatit“fixes”or“pegs”itscurrencyagainst.Interventionistheprocessofusingforeigncurrencyreservestobuyone’sowncurrencyinordertodecreaseitssupplyandthusincreaseitsvalueintheforeignexchangemarket，oralternatively,sellingone'sowncurrencyforforeigncurrencyinordertoincreaseitssupplyandloweritsprice.4.Howareforeignexchangetransactionsbetweeninternationalbankssettled？Answer：Theinterbankmarketisanetworkofcorrespondentbankingrelationships,withlargecommercialbanksmaintainingdemanddepositaccountswithoneanother，calledcorrespondentbankaccounts.Thecorrespondentbankaccountnetworkallowsfortheefficientfunctioningoftheforeignexchangemarket。Asanexampleofhowthenetworkofcorrespondentbankaccountsfacilitiesinternationalforeignexchangetransactions，consideraU.S.importerdes...
