The document discusses foreign exchange markets and operations. It defines foreign exchange as the trading of one currency for another. It describes the key participants in foreign exchange markets as international banks, their retail clients, corporations, speculators, brokers, and central banks. It also outlines the functions of the spot market for immediate currency exchange and the forward market for contracting future currency trades.

1. Foreign Exchange Operations

2. Chapter 4
The Market for
Foreign
Exchange

3. At the end of the chapter, students will be able
to:
understand the function and structure
of the FX market.
understand the function of the spot
market.
understand the function of the forward
market.
Learning Outcomes

4. WHAT IS A FOREIGN EXCHANGE MARKET?
Introduction

5. WHAT IS A FOREIGN EXCHANGE MARKET?
Trading of one currency for another.
https://www.youtube.com/watch?v=NhFlqFVBmxc
Introduction

6. WHAT CAN BE DONE TO STRENGTHEN THE MYR, AMONGST
INDIVIDUALS AND COMPANIES?
COMPANIES: SELL IN RINGGIT
ENCOURAGE TOURISM IN MALAYSIA amongst foreigners
ENCOURAGE INVESTMENTS in Malaysia
Introduction

7. WHAT IS FOREIGN EXCHANGE?

8. FOREIGN EXCHANGE MARKET

9. FOREIGN EXCHANGE MARKET
DO YOU THINK THERE IS A POSSIBILITY OF HAVING A
GLOBAL CURRENCY?

10. FOREIGN EXCHANGE MARKET

11. FOREIGN EXCHANGE MARKET

12. FOREIGN EXCHANGE MARKET

13. Discussion
1. What is the role of the foreign exchange market?

14. FOREIGN EXCHANGE MARKET
https://www.investopedia.com/articles/forex/11/who-trades-forex-and-
why.asp#:~:text=The%20foreign%20exchange%20or%20forex,FX%20and%20OTC%20derivatives%20
markets.

15. FUNCTION OF FOREIGN EXCHANGE MARKET

16. FOREIGN MARKET PARTICIPANTS
• The foreign exchange market consists of two-tiers.
• One tier is the wholesale or interbank market and the other tier is
the retail or client market.
• FX market participants can be categorized into seven groups:
international banks, bank customers, individuals and firms, nonbank
dealers, speculators and arbitragers, FX brokers and central banks.

17. FOREIGN MARKET PARTICIPANTS
• International banks provide the core of the FX market. These
international banks serve their retail clients, the bank customers , in
conducting foreign commerce or making international investment in
financial assets that require foreign exchange.
• Bank customers include MNCs, money managers, and private
speculators.

18. FOREIGN MARKET PARTICIPANTS
• Individuals (such as tourists) and firms (such as importers, exporters and
MNEs) conduct commercial and investment transactions in the foreign
exchange market.
• Their use of the foreign exchange market is for commercial or investment
purpose.
• Some of the participants use the market to “hedge” foreign exchange risk.

19. FOREIGN MARKET PARTICIPANTS
• Nonbank dealers are large nonbank financial institutions such as
investment banks, mutual funds, pension funds, and hedge funds, whose
size and frequency of trades make it cost-effective to establish their own
dealing rooms to trade directly in the interbank market for their foreign
exchange needs.
• In 2013, nonbank dealers accounted for 52 percent of interbank trading
volume.

20. FOREIGN MARKET PARTICIPANTS
• Most interbank trades are SPECULATIVE transactions, where market participants
attempt to correctly judge the future direction of price movements in one
currency versus another or attempt to profit from temporary price discrepancies
in currencies between competing dealers.
• Speculators and arbitragers seek to profit from trading in the market itself.
• They operate in their own interest, without a need or obligation to serve clients
or ensure a continuous market.
• Speculators seek all the profit from exchange rate changes and arbitragers try to
profit from simultaneous exchange rate differences in different markets.

21. FOREIGN MARKET PARTICIPANTS

22. FOREIGN MARKET PARTICIPANTS
• Foreign exchange brokers are agents who facilitate trading between dealers
without themselves becoming principals in the transaction.
• For this service, they charge a commission.
• It is a brokers business to know at any moment exactly which dealers want to
buy or sell any currency.
• Dealers use brokers for their speed, and because they want to remain
anonymous since the identity of the participants may influence short term
quotes.

23. FOREIGN MARKET PARTICIPANTS
• Central banks and treasuries use the market to acquire or spend their country’s
foreign exchange reserves as well as to influence the price at which their own
currency is traded.
• They may act to support the value of their own currency because of policies
adopted at the national level or because of commitments entered into through
membership in joint agreements such as the European Monetary System.
• The motive is not to earn a profit as such, but rather to influence the foreign
exchange value of their currency in a manner that will benefit the interests of
their citizens.

24. Question & Answer Session
1. List THREE parties involved in FX transactions?
https://www.youtube.com/watch?v=-qvrRRTBYAk

25. CURRENCY QUOTES
https://www.
pbebank.com
/Personal-
Banking/Rate
s-
Charges/Fore
x/Foreign-
Exchange-
Rates-
(Forex).aspx

26. CURRENCY QUOTES

27. CURRENCY QUOTES

28. TYPES OF FX TRANSACTIONS

29. DISCUSSION
Spot rate – USD 1 = RM 4.3 @ USD 10000 = RM 43000
Forward rate – USD 1 = RM 4.5 @ USD 10000 = RM 45000
(3 months)

30. Question & Answer Session
1. What is a ‘spot’ transaction?

31. SPOT MARKET VS FORWARD MARKET

32. SPOT MARKET VS FORWARD MARKET
https://www.youtube.com/watch?v=UYoLd6lNWKc

33. FORWARD MARKET
• The forward market involves contracting today for the future purchase or sale of
foreign exchange.
• The forward price may be the same as the spot price, but usually it is higher (at a
premium) or lower (at a discount) than the spot price.

34. FORWARD MARKET
HEDGE – PROTECT – INSURE against FX risk or fluctuations

35. SWAP MARKET
https://www.youtube.com/watch?v=6rX4ZEHQVCM
SWAP = SPOT TRANSACTION +
FUTURE TRANSACTION.

36. SWAP MARKET
https://www.youtube.com/watch?v=6rX4ZEHQVCM

37. FX RATES AND QUOTATION

38. Discussion
1. How to manage FX risks?

39. HOW TO MANAGE FX RISKS

40. HOW TO MANAGE FX RISKS

41. HOW TO MANAGE FX RISKS

42. SPREAD OF THE FOREIGN EXCHANGE MARKET

43. ADVANTAGES OF THE FOREIGN EXCHANGE MARKET