Foreign exchange market mechanism (FOREX) - International Business

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Transcript of Foreign exchange market mechanism (FOREX) - International Business

Foreign exchange market mechanism

Foreign exchange market mechanismInternational Business

Prepared By Manu Melwin JoyAssistant ProfessorIlahia School of Management StudiesKerala, India.Phone 9744551114Mail

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IntroductionThe foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks.

IntroductionFinancial centres around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.

IntroductionThe foreign exchange market assists international trade and investments by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states, especially Eurozon members, and pay euros, even though its income is in Unites States dollars. It also supports direct speculation and evaluation relative to the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.

IntroductionThe foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing.

IntroductionThe foreign exchange (FX or FOREX) market is the market where exchange rates are determined. Exchange rates are the mechanisms by which world currencies are tied together in the global marketplace, providing the price of one currency in terms of another. An exchange rate is a price, specifically the relative price of two currencies For example, the U.S. dollar/Mexican peso exchange rate is the price of a peso expressed in U.S. dollars. On January 4, 2010, this exchange rate was USD 1.4422 per EUR, or, in market notation, 1.4422 USD/EUR.

Functions of the Foreign Exchange Market

The foreign exchange market is the mechanism by which a person of firm transfers purchasing power form one country to another, obtains or provides credit for international trade transactions, and minimizes exposure to foreign exchange risk.

Functions of the Foreign Exchange Market

Transfer of purchasing power is necessary because international transactions normally involve parties in countries with different national currencies. Each party usually wants to deal in its own currency, but the transaction can be invoiced in only one currency.

Functions of the Foreign Exchange Market

Provision of Credit: Because the movement of goods between countries takes time, inventory in transit must be financed.

Functions of the Foreign Exchange Market

Minimizing Foreign Exchange Risk: The foreign exchange market provides "hedging" facilities for transferring foreign exchange risk to someone else.