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GDRs may be traded in multiple markets, generally referred to as capital markets, as they
are considered to be negotiable certificates. Capital markets are used to facilitate the trade
of long-term debt instruments, primarily for the purpose of generating capital. GDR
transactions in the international market tend to have lower associated costs than some
other mechanisms that can be used to trade in foreign securities.
Shares Per Global Depositary Receipt
Each GDR represents a particular number of shares in a specific company. A single GDR
can represent anywhere from a fraction of a share to multiple shares, depending on its
design. When multiple shares are involved, the receipt value shows an amount higher than
the price for a single share. Depository banks manage and distribute various GDRs and
function in an international context.
The purchase and sale of GDRs are managed through brokers representing the buyer,
generally from the home country, and seller within the foreign market. The actual purchase
of the assets are multi-staged, involving a broker in the investor's home, a broker located
within the market associated with the company that has issued the shares, a bank
representing the buyer and the custodian bank.
If an investor desires, GDRs can be sold through their brokers as well. They can be sold as
is on the proper exchanges, or they can be converted into regular stock for the company.
Additionally, they can be canceled and returned to the issuing company.
If the spot rate of a currency pair increases, the futures prices of the currency
pair have a high probability of increasing. On the other hand, if the spot rate of a
currency pair decreases, the futures prices has a high probability of decreasing.
Currency option
In finance, a foreign exchange option (commonly shortened to just FX option or currency option)
is a derivative financial instrument that gives the right but not the obligation to exchange money
denominated in one currency into another currency at a pre-agreed exchange rate on a specified
date.[1] See Foreign exchange derivative.
The foreign exchange options market is the deepest, largest and most liquid market for options of
any kind. Most trading is over the counter (OTC) and is lightly regulated, but a fraction is traded on
exchanges like the International Securities Exchange, Philadelphia Stock Exchange, or the Chicago
Mercantile Exchange for options on futures contracts. The global market for exchange-traded
currency options was notionally valued by the Bank for International Settlements at $158.3 trillion in
2005.[citation needed]
Example[edit]
For example, a GBPUSD contract could give the owner the right to sell 1,000,000 and buy
$2,000,000 on December 31. In this case the pre-agreed exchange rate, or strike price, is 2.0000
USD per GBP (or GBP/USD 2.00 as it is typically quoted) and the notional amounts (notionals) are
1,000,000 and $2,000,000.
This type of contract is both a call on dollars and a put on sterling, and is typically called a GBPUSD
put, as it is a put on the exchange rate; although it could equally be called a USDGBP call.
If the rate is lower than 2.0000 on December 31 (say 1.9000), meaning that the dollar is stronger
and the pound is weaker, then the option is exercised, allowing the owner to sell GBP at 2.0000 and
immediately buy it back in the spot market at 1.9000, making a profit of (2.0000 GBPUSD
1.9000 GBPUSD) 1,000,000 GBP = 100,000 USD in the process. If instead they take the profit in
GBP (by selling the USD on the spot market) this amounts to 100,000 / 1.9000 = 52,632 GBP.
The eurocurrency market has expanded to include other currencies such as the yen and the
British pound whenever they trade outside of their home market. However, the eurodollar
market remains the largest.
Size
The eurodollar trades mostly overnight, although deposits and loans out to 12 months are
possible. Even though deposits are domiciled off-shore, much of the activity actually takes
place in New York trading rooms while being booked into off-shore accounts. A 2016 study
by the Federal Reserve Bank indicated the average daily turnover in the eurodollar market
was $140 billion. Transactions are usually for a minimum of $25 million, and can top $1
billion in a single deposit.
Eurobond Market
There is an active bond market for companies and financial institutions to borrow in
currencies outside of their domestic market. The first such bond was by the Italian company
Autostrade in 1963. It borrowed $15 million for 15 years in a deal arranged in London and
listed on the Luxembourg stock exchange. In 2014, Apple was able to borrow $3.5 billion in
the eurodollar bond market.
One of the key economic decisions a nation must make is how it will value its
nation manages its currency in the foreign exchange market. An exchange rate
regime is closely related to that country's monetary policy. There are three
Many economists believe floating exchange rates are the best possible
The central bank of a country remains committed at all times to buy and sell
central bank maintain reserves of foreign currencies and gold. They can sell
The most famous fixed rate system is the gold standard, where a unit of
currencies. These countries can either choose a single currency to peg to, or a
fixed or periodically adjusted. These are a hybrid of fixed and floating regimes.
bank. The bands are adjusted periodically by the country's central bank.
indicators.
peg under the fixed exchange regimes, as well as the flexibility under the
floating exchange rate regime. The system is designed to peg at a certain value
reserves), the system can meet frequent but moderate exchange rate changes
but the currency is allowed to fluctuate within a larger band of greater than