...Foreign Exchange Markets and Transactions 1) Foreign Exchange Market In 1971 the US suspended the convertibility of the dollar to gold, and by 1973 the US and other nations had accepted floating exchange rates. Today the exchange market is the largest market in the world. The market is an elaborate network of trading desks, banks, cooperations and individuals who buy and sell currencies all over the world. 2) What is an Exchange Rate? An Exchange rate is the price of a currency. The rates are available from many print and electronic sources. Direct quotes = Exchange rates that are listed in the form of “US $ Equivalent” Indirect quotes = Rates listed in the form of “Currency per US” 2.1 ) Cross Exchange rates Most quotations in exchange rates tables are expressed in terms of the US dollar. But some occasions require exchange rates expressed in term of two non-US dollar currencies. These rates are called cross exchange rates. 2.2) Bid/Ask Spread When banks or brokers facilitate currency transactions they charge a fee for their service. In many cases these fees come from the difference between the bank´s bid and ask quotes -> called the bit/ask spread. 3) Exchange Rate Movements Prices and currencies can fluctuate. 3.1) Currency Appreciation and Depreciation Appreciate= a currency in value relative to other currencies. Depreciate= a currency decreases in value A purchasing power of one currency relative to...
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...Volatile Exchange In the Global Market Discuss and explain the functions of the foreign exchange market. The role of the foreign exchange market in international business and how it impacts a country's ability to do business is simple: It keeps the money flowing around the world. The foreign exchange (FOREX) market provides a place for nations to purchase, borrow, or sell their own currency to members of other nations. What the FOREX do in this regard is provide the resources for countries to make payments and transfer funds across borders, and provides purchasing power from one currency to another. These provisions make valuations of currency available to determine one of the greatest functions of the FOREX, the exchange rate. (Hill, 2011) The exchange rate is a price determined by the number of units of one nation's currency that must be surrendered in order to acquire one unit of another nation's currency. The exchange rate between two currencies is dependent upon official or private participants to buy and sell its currency to maintain an authorized pegged rate. The exchange rates in FOREX are set then by the market and not by governments. Even with these determinations, the biggest player in defining the exchange rates rely on supply and demand of American goods and currency. International business relies directly on the functionality of the FOREX. In addition to international business, citizens traveling to foreign nations have to rely on a standard in which...
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...The Foreign Exchange Market & Exchange Rate Introduction The term market has been interpreted in Economics as the place where both the buyers as well as the sellers meet and they buy and or sell goods. The foreign exchange market is a place where the transactions in foreign exchange are conducted. In practical world the external transaction requires the use of foreign purchasing power i.e. foreign currency. The foreign exchange market facilitates such transactions by performing number of functions. Definitions of Foreign Exchange Market According to Paul Einzig, "The foreign exchange market is the system in which the conversion of one national currency in to another takes place with transferring money from one country to another." According to Kindleberger, "It is place where foreign moneys are bought and sold." In simple words, the foreign exchange market is a market in which national currencies are bought and sold against one another. There are large numbers of foreign transactions such as buying goods abroad, visiting foreign country for any purpose. Corresponding nation in whose currency the transaction is to be fulfilled. The foreign exchange market provides the foreign currency against any national currency. However, it is to be understood that unlike other markets, this market is not restricted to any particular country or any geographic area. There are large numbers of dealers' instruments such as exchange bills, bank drafts, telegraphic transfers (TT), etc...
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...Foreign Exchange Markets Shalanda Massenburg Axia College During the 20th century, the exchange market rates were fixed, according to the amount of gold for which they could be exchanged (Federal Reserve Bank of New York, 2008). The gold exchange standard was adopted by Britain during the nineteenth century. There were a few positive aspects of the gold exchange standard. According to the Federal Reserve Bank of New York (2008), “It served as a common measure of value, it helped keep inflation in check by keeping money supply in the gold exchanged standard economies fairly stable, and long-term planning was easier as rate changes were infrequent”. According to Britannica Encyclopedia (2008), “The gold-exchange standard came into prominence after World War I because of an inadequate supply of gold for reserve purposes”. The United States adopted the gold standard back in 1900. The most recognized reserve currencies were from the United States dollar and the British sterling. Under the gold exchange standard, countries held gold or money as reserves but the United States held reserves just in gold. According to Bordo (2008), “many of the conditions that made the gold standard so successful vanished in 1914”. By 1971, the United States decided to abandon the gold exchange standard. According to Britannica Encyclopedia (2008), “A nation on the gold-exchange standard can keep the currency at parity with gold without maintaining a gold reserve as is required under the gold...
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...The Foreign Exchange Market Before the times of the foreign exchange market, the world depended on the gold standard to determine the value of goods and services. This paper will describe in more detail the gold standard, the positive and negative aspects of using the gold standard and in addition the paper will summarize the major functions of the world’s major foreign exchange markets. The gold standard was a monetary system that many countries used in order to determine the value of domestic currencies in relation to a specific amount of gold. The value of money, bank deposit and notes were transformed into gold at the specific amount. Britain was the first country to adopt the gold standard in 1816, followed by the United States. From 1834 until 1933 the specified price of gold in the United States was $20.67 per ounce (Bordo, 2002). However, in 1933 U.S. President Franklin D. Roosevelt put an end to the gold standard when he prohibited the possession of gold by any persons except for the purposes of owning or manufacturing jewelry (Moffatt, 2008). This was the beginning of the Bretton Woods System. Under the Bretton Woods System, countries agreed to settle their international balances by converting deficits into U.S. dollars at a flat exchange rate of $35 per ounce (Bordo, 2002). This monetary system only lasted until 1971 when President Richard Nixon completely ended the trading of gold (Moffatt, 2008). Since that time the gold standard has not been used by any major...
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...the Library is: • Building a world-renowned electronic research capacity on Caribbean Economic Development. • Ensuring the cross fertilization of ideas between academicians and practitioners through conferences and lectures, such as this one. • Facilitating the process of education for economic development. Summary of Presentation The W.D. Carter Lecture Series was held on September 18, 2013 in the Main Auditorium on the focus of the Foreign Exchange Market. It was brought across the audience that the Jamaican economy is in deep trouble due to the fact that the dollar is sliding rapidly. A discussion panel was formed with lecturers and a student from the Business Department. The foreign exchange market can be defined as the market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and investors. The determination of the foreign currencies are based on the exchanged rates due to the cause from inflation, interest rate, current account deficit, public debt, terms of trade, political stability and not to mention the performance of the economy itself. Depreciation of currencies occurs when a...
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...Introduction The term market has been interpreted in Economics as the place where both the buyers as well as the sellers meet and they buy and or sell goods. The foreign exchange market is a place where the transactions in foreign exchange are conducted. In practical world the external transaction requires the use of foreign purchasing power i.e. foreign currency. The foreign exchange market facilitates such transactions by performing number of functions. Definitions of Foreign Exchange Market According to Paul Einzig, "The foreign exchange market is the system in which the conversion of one national currency in to another takes place with transferring money from one country to another." According to Kindleberger, "It is place where foreign moneys are bought and sold." In simple words, the foreign exchange market is a market in which national currencies are bought and sold against one another. There are large numbers of foreign transactions such as buying goods abroad, visiting foreign country for any purpose. Corresponding nation in whose currency the transaction is to be fulfilled. The foreign exchange market provides the foreign currency against any national currency. However, it is to be understood that unlike other markets, this market is not restricted to any particular country or any geographic area. There are large numbers of dealers' instruments such as exchange bills, bank drafts, telegraphic transfers (TT), etc. There are certain other dealers such as brokers...
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...The Foreign Exchange Market of South Korea Brief Introduction of currency Won The currency used in South Korea is the Won, (sign: ₩; code: KRW), it can be further divided in 100 jeons, the subunit. Won has been existed for thousands of years in South Korean History. After the world war two, the Korea continent was divided into North Korea and South Korea. Both of the two countries have been using won as their currencies. The foreign exchange policy of won followed a pegging method to dollars before 1980. From 1980 to 1997 South Korea had initiated a series of actions towards floating exchange rate. During the East Asian financial crisis, the won was devalued at almost half of its original value. The monetary system The monetary system is basically consisting of four major government entities; “the Ministry of Finance and Economy (MOFE), the Bank of Korea (BOK), the Financial Supervisory Service (FSS), and the Korea Customs Service (KSS)” (Korea, South-Money). The bank of Korea, according to Savada and Shaw in their country paper on South Korea, is established as the central bank of South Korea and supervised all the financial transactions of diversified financial institutions. Its major functions also includes the issuance of currency, the determination on the monetary and credit policies, the collection and record of the statistics of overall economy, and the regulation of all private banks. It also closely partners with the central government for raising funds for public...
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...The functions of the gold standard was to give the worth of a countries currency a true measurement of its worth. The countries participating would measure their currency against the worth of gold. Since gold was highly sought-after, it was a fair measurement of how a currency would hold its value. The gold standard came and went, over a matter of 100 years and is no longer used today. Arguments have been made for the return of the gold standard, to no avail the fall out in the late 1970’s still carries its weight. After World War II, the Bretton Woods agreement controlled the European and American economy, with the intentions of repairing damage after the war. Eventually, the strategy failed and thus gave way for the start of the foreign exchange market and the free-floating system. The gold standard began in the early 1800’s and was used as a measurement of the worth of currency. The idea was that as gold held a certain value according to the demand and supply of itself, the currency of a country would be worth a fraction of the worth of gold. For example, if one ounce of gold was worth $100 then one U.S. dollar would be worth 1/100th of an ounce of gold. It also kept a hold on any country from printing too much money, so that it would not lose its value over time. This measurement could also be used with any metal, as in the 1800’s silver was also a precious metal (Moffatt, n.d.). During the presidency of Franklin D. Roosevelt, in 1933 the gold standard had come to...
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...The foreign currency exchange rate is an extremely dynamic market that affects all American companies operating internationally. In the recent years, the US Dollar has been under a systematic assault resulting in a decline in its value across the major world currencies. “This assault has included vocal countries, China for example, in demanding that the US Dollar be removed as the standard international currency” (Batson, 2009, pg.1). The foreign exchange rate of a currency is a general measurement of the financial health of a country, though the rates of exchange are not tied specifically to financial measurements. Therefore, a stronger dollar will benefit Americans more than a weaker dollar. One of the blessings in disguise maybe the value of the trade deficits that US has with a foreign country like China, it may decrease because Americans are not able to purchase more of the imported goods as their costs increase. The decline in the dollar’s value has benefited some American companies. US companies that export to places where the dollar is declining has seen an increase in their bottom line. “Foreigners buying US products in their own currency are able to buy more products as the US products are cheaper” (Salvatore, 2007, p. 346). The downfall of a drop in the dollar versus foreign currencies is the affects that the depreciation has upon US importers and Americans traveling abroad. For US importers, the cost of goods increases because it takes more dollars to buy the same...
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...Linkage of Foreign Exchange Author Info Elena Andreou Maria Matsi Andreas Savvides Registered author(s): Andreas Savvides Abstract This paper investigates bi-directional linkages between the stock and foreign exchange markets of a number of emerging economies. A quarto-variate VAR-GARCH model with the BEKK representation is estimated for each of twelve emerging economies to test for spillovers, both in terms of return and volatility, between the emerging stock market, foreign exchange market and global and regional stock markets. We find significant bi-directional spillovers between stock and foreign exchange markets. We also examine the effects of a country’s choice of exchange rate regime, on the one hand, and the Asian financial crisis, on the other, on the volatility spillover mechanism. GLOBAL LINKAGE OF FOREIGN EXCHANGE MARKETS 6 Introduction The foreign exchange market is the biggest financial market in the world. Every day, transactions worth about 3.98 trillion dollars are carried out within the market. The major aim of introducing the foreign exchange market is to facilitate international trade by enabling businesses to perform transactions outside their local currency. The market operates round the clock from Monday through Friday. Foreign Exchange is the simultaneous Buying of one currency and paying for it with another at an agreed price (exchange rate) for settlement on an agreed date. FOREX is an acronym for FOReign Exchange...
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...3.0 STRUCTURE OF THE FOREIGN EXCHANGE MARKET 3.1 Overview of the Local Foreign Exchange Market In 1993 Trinidad and Tobago shifted from a fixed exchange rate regime to that which is referred to as Managed Floating Rate, whereby the par value of the Domestic Currency in terms of the Foreign Currency is based on the prevailing market rates. An emphasis is placed on defending the stability of TT/US Rate in order to promote exports and consumption. The dollar appreciates or depreciates in response to changes in demand and supply conditions in the foreign exchange market and intervention policy by the Central Bank seeks to manage these fluctuations by effecting a systematic approach to achieving a rate that is aligned to our country’s future economic goals. This System encompasses a Two Tier System as follows: • Tier 1: US Supply from Three Large Energy Companies Namely Petrotrin, NGC and PCS Nitrogen Allocated to commercial banks based on market share. • Tier 2: US Dollars from other energy companies and exporters would be allocated among commercial banks according to Market Share. • An Intervention System: In order to maintain stability and confidence and to prevent high exchange rate volatility in the market, the CBTT intervenes to meet the shortfall of Demand and Supply. Intervention system for Foreign Exchange is distributed to authorized dealers (see appendix 1) in the following ways: 1) Non-competitive Sale based on Market Share 2) Auction Sale with a price Cap In...
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...The Risk that are Involved in Foreign Exchange Market FIN-571 January 14, 2017 Kevin Suber The Risk that are Involved in Foreign Exchange Market In a foreign market trade investors can purchase stock in the international market exchange. Investors buy into the foreign exchange market, because it makes the investor make valuable profits quicker in a good economy. For most investors this would seem to be too good of a deal to pass up however, there can be some risk involved investing in a foreign market. In this paper I will be discussing the types of risk involved in the market. Here are a few type of risk an investor could potential be hit with in a foreign exchange market. The foreign exchange risk include, exchange rate risk, interest rate risk, and country and liquidity risk just to name a few of the major risk. For investors it is important to understand the risks in the foreign market trade. The big risk like exchange rate risk can be damaging to an investor portfolio because it is based on the market perception. The exchange rate risk also factors a largely unregulated Forex off-exchange trading. Another risk involved in the foreign market is the interest rate risk. The interest rate risk by fluctuating in the forward speeds and forward mismatch of in maturity gaps in the transaction of the foreign exchange. To include with the following risk would be the country and liquidity risk in the foreign market. The investor does risk the potential of a country or liquidity...
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...Scope and Limitation of the Study………………………… 7 8. Research Methodology……………………………………. 7 II. Literature Review……………………………………………… 8-9 III. Discussion III.1. Interest rate versus exchange rate in Bank deposit……… 10 III.1.1 Appreciate US Dollar in Bank Deposit factor…10-11 III.1.2 Depreciate US Dollar in Bank Deposit factor….. 11 III.2. Interest rate affected in Stock market…………………... 11 III.2.1 Depreciate US Dollar in Stock Market………..11-12 III.2.2 Appreciate US Dollar in Stock Market..................12 IV. Conclusion……………………………………………………… 13 V. References…………………………………………………….14-15 Abstract In this paper, I use high frequency data to investigate the extent to which interest rate changes originated in the United States by the Reserve Federal Fund. More specifically, I am interested in understanding in effects of changes in the Federal Reserve Fund’s interest rates on differential between (short term) local currency interest rates. I also investigate how interest rate influences to the foreign exchange market when Federal set the interest rate. The result indicates that Federal Reserve’s rate can influence foreign exchange market in the bank deposit factor and in the stock market. Key words: U.S Federal Reserve, Federal Fund rate, Interest rate and foreign exchange market. ACKNOWLEDGMENTS First of all, I have been blessed with the help of some wonderful people while preparing this term paper. Thanks must first given to Dr. CHHUN Vannak, the lecturer...
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...Kuperan Viswanathan SHORT PAPER #1 INTERDEPENDENCE OF WORLD FINANCIAL MARKETS AND FOREIGN EXCHANGE FLUCTUATIONS Submitted by: ZAHARIN BIN ALI MATRIC No. 95906 June 14, 2014 Short Paper #1 Page |2 1. INTRODUCTION With the increase in advancements in transportation and communications made possible by technology, the world has seen exponential growths in economic ties among all nations. In the last few decades, globalization has resulted in a rapid surge in the interchanging of goods and services reaching across further and faster beyond national borders, whilst increasing the interconnectedness of different markets and cultures. These economic ties come in the forms of international trade, foreign direct investment and monetary integration, made possible with the complementary increase in the interdependence of international financial markets. With further liberalization and deregulation, financial market interdependence grew in momentum alongside the worldwide capital mobilization. This growing interconnectedness of all the world financial markets and the degree of their interdependence have themselves created a subject of substantial interest among economists. The recent global financial crisis has only elevated this interest further, as the impact of U.S. subprime crises on the world economies have provided evidence of global financial markets interdependence. Many international stock markets, for example, experienced their worst abrupt declines in their history...
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