...Foreign Exchange Market Demond McKeever National University In view of the fact that the international business environment is not set up with a worldwide medium for exchange, the foreign exchange market is a necessity for international trade. The major functions of the foreign exchange market are to transfer purchasing power, allocate open trade for international markets, monitor exchange rates from fluctuating to rigorously, and to aid in the import and export of goods between countries by providing credit for financing international trade (Suranovic, 2005) The foreign exchange market or forex market as it is often called is the market in which currencies are traded. Currency Trading is the world’s largest market consisting of almost trillion in daily volume and as investors learn more and become more interested, the market continues to rapidly grow. Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets. In addition, there is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter. Unlike the stock market, this decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices. Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to...
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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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...- I Foreign Exchange Markets A Foreign exchange market is a market in which currencies are bought and sold. It is to be distinguished from a financial market where currencies are borrowed and lent. General Features Foreign exchange market is described as an OTC (Over the counter) market as there is no physical place where the participants meet to execute their deals. It is more an informal arrangement among the banks and brokers operating in a financing centre purchasing and selling currencies, connected to each other by tele communications like telex, telephone and a satellite communication network, SWIFT. The term foreign exchange market is used to refer to the wholesale a segment of the market, where the dealings take place among the banks. The retail segment refers to the dealings take place between banks and their customers. The retail segment refers to the dealings take place between banks and their customers. The retail segment is situated at a large number of places. They can be considered not as foreign exchange markets, but as the counters of such markets. The leading foreign exchange market in India is Mumbai, Calcutta, Chennai and Delhi is other centers accounting for bulk of the exchange dealings in India. The policy of Reserve Bank has been to decentralize exchages operations and develop broader based exchange markets. As a result of the efforts of Reserve Bank Cochin, Bangalore, Ahmadabad and Goa have emerged as new centre of foreign exchange...
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...UNIT - I Foreign Exchange Markets A Foreign exchange market is a market in which currencies are bought and sold. It is to be distinguished from a financial market where currencies are borrowed and lent. General Features Foreign exchange market is described as an OTC (Over the counter) market as there is no physical place where the participants meet to execute their deals. It is more an informal arrangement among the banks and brokers operating in a financing centre purchasing and selling currencies, connected to each other by tele communications like telex, telephone and a satellite communication network, SWIFT. The term foreign exchange market is used to refer to the wholesale a segment of the market, where the dealings take place among the banks. The retail segment refers to the dealings take place between banks and their customers. The retail segment refers to the dealings take place between banks and their customers. The retail segment is situated at a large number of places. They can be considered not as foreign exchange markets, but as the counters of such markets. The leading foreign exchange market in India is Mumbai, Calcutta, Chennai and Delhi is other centers accounting for bulk of the exchange dealings in India. The policy of Reserve Bank has been to decentralize exchages operations and develop broader based exchange markets. As a result of the efforts of Reserve Bank Cochin, Bangalore, Ahmadabad and Goa have emerged as new centre of foreign exchange market. Size...
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...Chapter 4—Exchange Rate Determination 1. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%. a.|depreciated; 5.80| b.|depreciated; 4.00| c.|appreciated; 5.80| d.|appreciated; 4.00| ANS: C SOLUTION:|($0.73 - $0.69)/$0.69 = 5.80%| PTS: 1 2. If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction. a.|liquid; highly sensitive| b.|illiquid; insensitive| c.|illiquid; highly sensitive| d.|none of the above.| ANS: C PTS: 1 3. ____ is not a factor that causes currency supply and demand schedules to change. a.|Relative inflation rates| b.|Relative interest rates| c.|Relative income levels| d.|Expectations| e.|All of the above are factors that cause currency supply and demand schedules to change.| ANS: E PTS: 1 4. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____. a.|increase; appreciate| b.|increase; depreciate| c.|decrease; depreciate| d.|decrease; appreciate| ANS: B PTS: 1 5. An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale. a.|reduce; increase| b.|increase;...
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...Chapter 4—Exchange Rate Determination 1. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%. a.|depreciated; 5.80| b.|depreciated; 4.00| c.|appreciated; 5.80| d.|appreciated; 4.00| ANS: C SOLUTION:|($0.73 - $0.69)/$0.69 = 5.80%| PTS: 1 2. If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction. a.|liquid; highly sensitive| b.|illiquid; insensitive| c.|illiquid; highly sensitive| d.|none of the above.| ANS: C PTS: 1 3. ____ is not a factor that causes currency supply and demand schedules to change. a.|Relative inflation rates| b.|Relative interest rates| c.|Relative income levels| d.|Expectations| e.|All of the above are factors that cause currency supply and demand schedules to change.| ANS: E PTS: 1 4. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____. a.|increase; appreciate| b.|increase; depreciate| c.|decrease; depreciate| d.|decrease; appreciate| ANS: B PTS: 1 5. An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale. a.|reduce; increase| b.|increase;...
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...Introduction The term “foreign exchange” basically refers to buying the currency of one country while selling the currency of another country. All nations have their own, different kinds of money (currency). This has existed throughout the ages, probably since the time of the Babylonians. As trading developed between nations, the need to convert one kind of money to another also developed. This is how a formal system of foreign exchange arose. As trade between nations developed, Britain, as the nation with the largest and strongest navy, could spread its commercial interests far and wide. It therefore became the most active trading nation, with a vast empire of colonies. As a result, Britain’s currency, the pound sterling, became a benchmark to which other currencies were compared (and exchanged) for most of the seventeenth, eighteenth and nineteenth centuries. Today, most currencies are compared to the U.S. Dollar, currently the most active and commercially strong trading nation; many currencies are still “pegged” to the U.S. Dollar for their exchange rate. Because FX risks can be identified, they can be managed. Foreign exchange management requires that governments, companies, and individuals understand the factors that influence the valuation of currency. By identifying these factors, they can enter into transactions that mitigate the risks to acceptable levels. These transactions, or hedge positions, are designed to maximize the economic benefit of foreign exchange receipts, and...
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...differences in the transaction between a domestic and a foreign business as compare to that between businesses of the same country. For example, an Australian or a US importer would generally have to pay a Japanese exporter in yen, a German in Euros, and a British in Pounds. For these reasons both the Australian and the US importer will have to buy these currencies with dollars in the foreign exchange market, which determines how many dollars will be needed in an exchange for each currency. In the world economy the difference between making business domestically and internationally differs under many distinct levels. However, for the purpose of this essay this paper will focus on foreign exchange respectively in context of international business under fixed and floating exchange rate. Conducting business both domestically and internationally involves understanding the foreign exchange market, and selecting the best exchange rate system for your business. This paper has three distinct purposes. First it will outline a clear definition of both fixed and floating exchange rate system. Second, it will discuss the costs and benefits of both systems. And finally it will state the most preferred and widely used system between the two systems. An exchange rate is the rate or the price at which one currency is worth when converted into that of another. In a foreign transaction, the foreign exchange market is where these activities take place. In definition, the foreign exchange market is “a market...
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...Introduction to Foreign Exchange: Foreign Exchange means Foreign Currency. If we consider Foreign Exchange as a subject then it means all kinds of transactions related to foreign Currency, as well as currency instruments such as draft, MT, TT, TC, and Payment Order & Foreign Trade. In other words Foreign Exchange deals with Foreign Financial Transactions. Foreign Exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another currency and, thereby, involves the international transfer of money. It is the means of method by which rights to wealth in a country’s currency are converted into rights to wealth in another currency. In banks where we talk Foreign Exchange, we refer to the general mechanism by which a bank converts currency of one country into that of another’s. Dr. Paul Einzig defines Foreign Exchange as the system or process of converting one national currency into another and of transferring the ownership of money from one country to another. In terms of Foreign Exchange Regulations Act, 1947 as adapted in Bangladesh, Foreign Exchange means Foreign Currency and include all deposits credits and balances payable in Foreign currency as well as all Foreign currency instruments, such as, Drafts, Travelers Cheques, Bill of Exchange, Hundi, and Promissory Notes payable in any foreign country. Evaluation of Foreign Exchange Rate System in Bangladesh: With the demise of the foreign currency exchange rates during...
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...Chapter 5 Exchange Rate Systems questions 1. How can you quantify currency risk in a floating exchange rate system? Answer: To characterize the risk of a currency position, you must try to characterize the conditional distribution of the future exchange rate changes. With floating exchange rates, historical information provides useful information about this distribution. For example, you can use data to measure the average historical dispersion (standard deviation or volatility) of the distribution. The higher this volatility, the riskier are positions in this currency. It is also possible to rely on more forward-looking information using the options markets (see Chapter 20). Finally, we should point out that volatility is an adequate indicator of risk when exchange rate changes are approximately normally distributed. In reality, the distribution of exchange rate changes displays fat tails, even in floating exchange rate systems, and this increases the risk of currency positions. 2. Why might it be hard to quantify currency risk in a target zone system or a pegged exchange rate system? Answer: If the peg or target zone holds for a long time, historical volatility appears to be zero or very limited, but this may not accurately reflect underlying tensions that may ultimately result in a devaluation or revaluation of the currency. Hence, the true currency risk does not show up in day-to-day fluctuations of the exchange rate. It is hard to quantify this...
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...the Foreign Exchange Market as well as the Net International Reserves, their stabilizing methods and strategies, along with a discussion on the analysis and effects of the measures taken to attain success within the Jamaican economy. The foreign exchange market is defined as (main function) a market used for converting from one country’s currency to another using an exchange rate which determines the value of one country’s currency against another. The Jamaican foreign exchange market came to full liberalization in the 1990’s. Since then there has been much discussion on the efficiency of the market and the appropriateness of the foreign exchange rate. “The use of market microstructure models has become very popular in financial market research stemming from the inability of traditional macroeconomic models to adequately capture the short-term dynamics of financial markets” (Frankel and Froot, 1990).There have been concerns as to whether the foreign exchange rate correctly reflects the forces of supply and demand in the market. The role of the Bank of Jamaica when it pertains to foreign exchange market is market intervention, market surveillance and data collection and information dissemination; with particular attention paid to intervention. The secondary function of the foreign exchange market is to provide insurance against foreign exchange risk. Foreign exchange risk can be defined as any adverse consequence or unpredictable change that may occur to the exchange rate...
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...worldwide economy, international transactions are widely utilised in modern countries. In turn exchange rate is playing an increasing significant role in current economy activities. As far as we know exchange rate is very variable and volatile therefore if we cannot have knowledge of the effects of exchange rate on international transactions, it would potentially result in huge lost because of the fluctuations in exchange rate. In this report we are going to discuss 4 basic theories affecting exchange rate that includes: international monetary systems, the balance of payments, exchange rate determinations and international arbitrage. And we will concentrate on the underlying concept and characteristics of each theory and apply them in real world by comparing currency pair actual historical movements, in this report, we specific focus on USD/JPY. The objective of this report is to learn and apply those 4 basic theories and get a clear understanding of how exactly they would affect exchange rate. Finally we will draw conclusions based upon our researches, historical data, and some specific articles in real world. 2. Discussions 2.1 International Monetary System The International Monetary System is the framework of rules, regulations and conventions that govern the financial relations among countries. Such a system is necessary to define a common standard of value for the international currencies. In here, we will mainly discuss the exchange movement of United State Dollar...
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...Table of Contents Introduction 2 Factors affecting exchange rate 4 Is an appreciation good or bad? 8 Reasons for Currency Appreciation in Pakistan 8 Impact of Pak rupee appreciation on Economy of Pakistan 9 Impact on Sectors 13 Conclusion/ Recommendations 14 References 15 Introduction Exchange rate can be defined as rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates,inflation, and the state of politics and the economy in each country also called rate of exchange or foreign exchange rate or currency exchange rate. An increase in the value of one currency in terms of another. Currencies appreciate against each other for various reasons, including capital inflows and the state of a country's current account. Typically a forex trader trades a currency pair in the hopes of currency appreciation of the base currency against the counter currency. The dollar has depreciated significantly against the rupee. As this has been a highly noticeable and largely unexpected event, it has raised a plethora of questions in the minds of citizens, and conspiracy theories have done the rounds. Yet dollar depreciation against the rupee is not as mysterious...
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...On Foreign Exchange Market with Hedging Instruments In partial fulfillment of the requirements of for award of Master of Management Studies Through Atharva Institute of Management Studies under the guidance of Prof. Aditi Mahajan Submitted by Paras Gada MMS Batch: 2010 – 2012. DECLARATION I, Mr. Paras Gada of Atharva Institute of Management Studies pursuing Masters of Management Studies hereby declares that I have completed this project on “Foreign Exchange Market with Hedging Instruments” for the Academic period 2010 – 12. The Project has not formed the basis for award of any other degree, associates, fellowship or any other similar titles. This information submitted is true and original to the best of my knowledge. Place: Mumbai Date: 3rd April, 2012 Signature of the Student ACKNOWLEDGEMENT The present work is an effort to throw some light on ‘Foreign Exchange market with Hedging Instrument’ the work would not have been possible to come to the present shape without the able guidance, supervision and help to me by number of people. With deep sense of gratitude I acknowledged the encouragement and guidance received by Prof Aditi Mahajan, for completion of my project report. CERTIFICATE This is to certify that Mr. Paras Gada, a student of Atharva Institute of Management Studies, of MMS SEM IV bearing Roll No. 12 and specializing in Finance has successfully completed the project titled “To study Foreign Exchange market with...
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...Executive Summary ___________________________________________________________________________ The foreign exchange market does not have a physical market place called the foreign exchange market. It is a mechanism through which one country's currency can be exchange i.e. bought or sold for the currency of another country. The foreign exchange market does not have any geographic location. The market comprises of all foreign exchange traders who are connected to each other through out the world. They deal with each other through telephones, telexes and electronic systems. The foreign exchange market operates twenty four hours a day during the business week; the only time it is silent is after the New York market closes on Friday afternoon and before the Sydney market opens on Monday morning (which would be Sunday evening New York time). In the aftermath of the Asian crisis, which curbed and restricted offshore trading in regional currencies, most derivatives markets in Asia are still in their infancy. Financial institutions trying to introduce or transplant products from mature markets to those that are lesser developed are meeting with limited success. The RBI has ushered rupee derivatives trading into the country: it has formally allowed banks and corporate to hedge against interest rate risks through the use of interest rate swaps (IRS) and forward rate agreement (FRA). According to the guidelines issued by RBI there will be no restriction on the tenure and size of the...
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