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The Foreign Exchange Market

The document discusses the foreign exchange market, including the spot and forward markets. The spot market facilitates immediate currency transactions that are settled within 2 business days. The forward market involves agreements to exchange currencies at a future date at a fixed exchange rate. Major participants in the spot market include commercial banks, brokers, and customers of banks. The forward market involves arbitrageurs, traders, hedgers, and speculators. The purpose of the forward market is to hedge against foreign exchange risk when conducting international transactions.

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Viswadeep Sivakumar
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46 views14 pages

The Foreign Exchange Market

The document discusses the foreign exchange market, including the spot and forward markets. The spot market facilitates immediate currency transactions that are settled within 2 business days. The forward market involves agreements to exchange currencies at a future date at a fixed exchange rate. Major participants in the spot market include commercial banks, brokers, and customers of banks. The forward market involves arbitrageurs, traders, hedgers, and speculators. The purpose of the forward market is to hedge against foreign exchange risk when conducting international transactions.

Uploaded by

Viswadeep Sivakumar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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The Foreign Exchange Market

I. INTRODUCTION

A. The Currency Market:


where money denominated in one
currency is bought and sold with money
denominated in another currency.
B. International Trade and Capital Transactions:
- facilitated with the ability to transfer
purchasing power between countries

Two Types of Currency Markets


1. Spot Market:
- immediate transaction
- recorded by 2nd business day
2.Forward Market:
- transactions take place at a specified future date

ORGANIZATION OF THE FOREIGN EXCHANGE


MARKET
Participants by Market
1. Spot Market
a. commercial banks
b. brokers
c. customers of commercial and central
banks
ORGANIZATION OF THE FOREIGN
EXCHANGE MARKET
2. Forward Market
a. arbitrageurs
b. traders
c. hedgers
d. speculators
Currency Arbitrage
1. If cross rates differ from one financial center
to another, and profit opportunities
exist.
2. Buy cheap in one market, sell at a higher price
in another
THE FORWARD MARKET

I.INTRODUCTION
A. Definition of a Forward Contract
An agreement between a bank and a customer to
deliver a specified amount of currency against another
currency at a specified future date and at a fixed
exchange rate.
THE FORWARD MARKET
2. Purpose of a Forward:
Hedging
the act of reducing exchange
rate risk.
THE FORWARD MARKET
B. Forward Rate Quotations
1. Two Methods:
a. Outright Rate: quoted to
commercial customers.
b. Swap Rate: quoted in the interbank
market as a discount or premium.
The Role of Foreign Exchange Markets
in the Global Marketplace
Exchange Rate
The value of one currency relative to another currency as
the number of units of one currency required to purchase
one unit of the other currency.
Foreign-Currency-Denominated Financial
Instrument
A financial asset, such as a bond, a stock, or a bank
deposit, whose value is denominated in the currency of
another nation.
The Spot Market for Foreign Exchange
Spot Market
A market for the immediate purchase and delivery of
currencies.
Spot Exchange Rates
Market prices of foreign exchanges in the spot market
that are the rates pertaining to the trading of foreign-
currency-denominated deposits among major banks in
amounts of $1 million and more.
Exchange Rates as Relative Prices
Bilateral Exchange Rate
An exchange rate that relates the values of two
currencies, it is a relative price meaning “two sides.”
Currency Appreciation
The amount of one currency required to purchase
another currency has decreased.
Currency Depreciation
The amount of one currency required to purchase
another currency has increased.
Foreign Exchange Risk and the Forward
Market for Foreign Exchange
Foreign Exchange Risk
The risk that the value of a future receipt or obligation
will change due to variations in foreign exchange rates.
Types of Foreign Exchange Risk Exposure
Transaction exposure
Translation exposure
Economic exposure
Thank You

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