The foreign exchange market allows for the trading of one country's currency for another. It is made up of dealers, financial institutions like banks, and non-financial companies. There are two main segments - the over-the-counter market where trades occur directly between parties, and exchange traded markets where trades occur through security exchanges. Common instruments traded on this market include spot transactions for immediate exchange, forwards for exchange at a future date, currency swaps, options, and futures contracts. Companies use the foreign exchange market for importing/exporting and other financial flows, as well as for business purposes like hedging risks from currency fluctuations or pursuing arbitrage opportunities.
1. Foreign exchange money denominated in the currency of another nation or group of
nations. The market in which these transactions take place is the foreign exchange market. An
exchange rate is the price of the currency. Players on The Foreign Exchange Market The
Bank for International Settlements (BIS) divides the market into three major categories:
1.ReportingDealers-Known as money center banks. –the 10 largest banks in terms of
overall market share in foreign exchange trading.-Influential in setting prices. 2.
Financial Institutions-Commercial banks other than the money center banks. –Investment
Corporations Bangladesh and other banks of Bangladesh. 3. Non-financial Institutions-
Deals foreign exchange-Western Union Segments of Foreign Exchange Market •Over-the-
Counter Market(OTC)-Composed of commercial banks, investment banks and other financial
institutions.-Market participants trade stocks , commodities, currencies or other instruments directly
between two parties, without a central exchange or broker.-Trading is conducted electronically.-A trade
can be executed in OTC market without others being aware of the price at which the transactions was
completed. •The Exchange Traded Market-Composed of security exchanges. Traditional
Foreign-Exchange Instruments Spot transactions-Immediate exchange of currency (generally
on the second business day)-The rate at which the transaction is settled is the spot rate.
Outright Forward Transactions-The exchange of currency on a future date.-Single
purchase or sale of a currency for future delivery.-Transactions settled at the forward rate no
matter what the actual spot rate at the time of settlement. FX swap-One currency is swapped
for another on one date and then swapped back on a future date. Other Foreign-Exchange
Instruments> Currency Swap-Deal more with interest-bearing financial instruments such as, bonds. –
Two parties exchange an equivalent amount of money with each other but indifferent currencies.
Options –The right, but not the obligation to buy or sell an underlying asset at an agreed-upon price
and date. A Future Contract – An agreement between two parties to buy or sell a particular currency
at a particular price on a particular future date. Major Foreign Exchange Market> The Spot Market The
Forward Market Options Futures How Companies Use Foreign Exchange •Business Purposes:
Cash Flow Aspects of Imports and Exports –Commercial Bills of Exchange (a written order used
primarily in international trade that binds one party to pay a fixed sum of money to another
party on demand or at a predetermined date)-Letter of Credit (a letter from a bank
guaranteeing that a buyer’s payment to seller will be received on time and for the correct
amount) •Business Purposes: Other Financial Flows Speculation(the act of conducting a
financial transaction that has substantial risk of losing value but also holds the expectation of a
significant gain or other major value) Arbitrage(the purchase and sale of an asset in order to
profit from a difference in the asset’s price between markets). Company engage>To earn a
profit, To acquire resources and supplies, To export of excess goods, To satisfy regional human needs,
To spread their business activities, Proper utilization of resources, Formulation and develop new
industry, To increase national income, Attracting foreign aid. For entrepreneurs, changes in
exchange rates affect their businesses in two main ways: by changing the cost of supplies that
are purchased from a different country, and by changing the attractiveness of their products
to overseas customers.