Download - Foreign exchange market mechanism (FOREX) - International Business

Foreign exchange market mechanismInternational Business

Prepared By

Manu Melwin JoyAssistant Professor

Ilahia School of Management StudiesKerala, India.

Phone – 9744551114Mail – [email protected] restrict the use of slides for personal purpose.

Please seek permission to reproduce the same in public forms and presentations.

Introduction

• The foreign exchangemarket (forex, FX, orcurrency market) is aglobal decentralizedmarket for the tradingof currencies. Themain participants inthis market are thelarger internationalbanks.

Introduction

• Financial centres aroundthe world function asanchors of tradingbetween a wide range ofmultiple types of buyersand sellers around theclock, with the exceptionof weekends. The foreignexchange marketdetermines the relativevalues of differentcurrencies.

Introduction

• The foreign exchange marketassists international trade andinvestments by enabling currencyconversion. For example, itpermits a business in the UnitedStates to import goods from theEuropean Union member states,especially Eurozon members, andpay euros, even though its incomeis in Unites States dollars. It alsosupports direct speculation andevaluation relative to the value ofcurrencies, and the carry trade,speculation based on the interestrate differential between twocurrencies.

Introduction

• The foreign exchange marketis the most liquid financialmarket in the world. Tradersinclude large banks, centralbanks, institutional investors,currency speculators,corporations, governments,other financial institutions,and retail investors. Theaverage daily turnover in theglobal foreign exchange andrelated markets iscontinuously growing.

Introduction• The foreign exchange (FX or FOREX)

market is the market whereexchange rates are determined.Exchange rates are the mechanismsby which world currencies are tiedtogether in the global marketplace,providing the price of one currencyin terms of another. An exchangerate is a price, specifically therelative price of two currencies Forexample, the U.S. dollar/Mexicanpeso exchange rate is the price of apeso expressed in U.S. dollars. OnJanuary 4, 2010, this exchange ratewas USD 1.4422 per EUR, or, inmarket notation, 1.4422 USD/EUR.

Functions of the Foreign Exchange Market

• The foreign exchangemarket is the mechanism bywhich a person of firmtransfers purchasing powerform one country toanother, obtains orprovides credit forinternational tradetransactions, and minimizesexposure to foreignexchange risk.


• Transfer of purchasingpower is necessarybecause internationaltransactions normallyinvolve parties incountries with differentnational currencies. Eachparty usually wants todeal in its own currency,but the transaction canbe invoiced in only onecurrency.


• Provision of Credit:Because themovement of goodsbetween countriestakes time, inventoryin transit must befinanced.


• Minimizing ForeignExchange Risk: Theforeign exchangemarket provides"hedging" facilities fortransferring foreignexchange risk tosomeone else.