The Vietnam Believer Newsletter_May 13th, 2024_ENVol. 007.pdf
Foreign exchange market
1. Foreign Exchange
Market
GROUP 10:
ĐINH THI HUONG
LE THI TRANG
NGO THI THUY
TRAN THI HUONG
GIANG
DO THI THANH THAO
2. What is the FX market?
Exchange rate
Role of the state bank in FX
3. What is the Forex Market?
The Forex Market is a net work of
buyers and sellers operating without a
centralized exchange where one
currency is transferred for another
currency between participants at
agreed upon prices.
Forex is stand for Foreign Exchange
phrase
Foreign exchange market (Forex) is market
currencies between banks was established in 1971
when floating exchange rate are specified
4. What is the Forex Market?
Traders include: banks, central banks,
institutional investors, currency
speculators, corporations,
governments, retail investors,..
This is $ 1 Trillion
The daily volume of
FX market is $ 5 Trillion
Largest and most liquid financial
market in the world.
5. What is the Forex Market?
Forex does not have a financial
center or any transaction. The
foreign exchange market is the
market "interbank", and based
on electronic transactions
between systems linked together
banks
operates 24 hours a day
6. What is the Forex Market?
Currencies are bought and sold in units
called lots
1 lot = 100,000 units of the base currency
1 lot of EUR/USD =
€1 (1 Euro)
X
100,000
Standard symbols for most commonly
traded currencies:
EUR – Euro
USD – United States
dollar
CAD – Canadian
dollar
GBP – British pound
HKD – Hong Kong
dollar
JPY – Japanese yen
AUD – Australian
dollar
CHF – Swiss franc
NZD – New Zealand
dollar
SEK – Swedish krona
Currencies are traded in pairs
GBP/USD or USD/JYP
7. Exchange Rate
A rate of exchange is the price of one currency in terms of another;
rates are quoted in two ways:
1. A variable number of units of foreign currency to a fixed number of
units of home currency: e.g. euro 1.4640 = £1; or Hong Kong dollars
14.14.4531= £1. This type of rate quotation is termed an “indirect rate”.
2. A number of units of home currency to one unit of overseas
currency: e.g. quotations in euros are quoted to one unit of overseas
currency. This type of quotation is termed a “direct rate”.
A Spot rate is the rate of exchange for a foreign currency transaction
which is to be settled within two working days of agreeing the rate.
A Forward rate is a rate of exchange which is fixed ‘now’ for a deal
which will take place at a fixed date or between two days in the
future.
8. Exchange Rate
FIXED EXCHANGE
RATE
A fixed exchange rate
system is one where the
value of the exchange
rate is fixed to another
currency. This means that
the government have to
intervene in the foreign
exchange market to
maintain the fixed rate
Revaluation - this also
describes an upward
movement in an
exchange rate, but in
a fixed exchange rate
system. This will be a
very infrequent event
(if ever) and means the
government has
deliberately changed
the fixed value of the
exchange rate
upwards.
Devaluation - this
means that the
government has
changed the fixed rate
of a fixed exchange
rate downwards.
9. Exchange Rate
FLOATING EXCHANGE
RATE
Where the exchange rate
is floating (as are all major
currencies in the world), it
will be determined by
market forces - that is
supply and demand. As in
any other market, the rate
will change constantly to
reflect how much of the
currency is being traded.
However, what determines
the supply and demand
for the currency?
Appreciation - this describes an upward movement in a
freely floating exchange rate. This may occur day by day
or perhaps even minute by minute.
Depreciation - this describes a downward movement in a
floating exchange rate.
11. Exchange Rate
BOP will record:
Import
Export
Inflow of foreign investment
Foreign revenue
If the foreign revenue is larger than
payment, there will be a larger supply
of foreign currencies.
If the foreign payment is larger than
revenue, then the demand for foreign
currencies will be higher
It is the market rate on the day the rate is agreed; it should be noted that the spot rate of exchange can fluctuate quite dramatically from day to day and therefore for continuing trade it is not a basis upon which to work.
A Fixed Forward contract is where the future date at which the transaction will take place is fixed. An Option Forward contract is where the time at which the transaction will take place is any time within a specified period.
In Figure 1 below, the equilibrium is above the fixed rate. There is a shortage of the national currency at the fixed rate. This would normally force the equilibrium exchange rate upwards, but the rate is fixed and so cannot be allowed to move. To keep the exchange rate at the fixed rate the government will need to intervene. They will need to sell their own currency from their foreign exchange reserves and buy overseas currencies instead. This has the effect of shifting the supply curve to S2 and as a result, their foreign currency holdings will rise. In Figure 2, the opposite is true - the equilibrium rate is below the fixed rate. This means that there is a surplus of the national currency. The government will need to buy this surplus if they are to prevent the currency from falling - in other words keep it at the fixed rate. When they buy the currency they will be selling from their foreign currency reserves and so these will fall, but the demand for domestic currency will rise.
The people who demand baht are those who have bought goods and services from Thailand and need to pay in baht. To do this they need to sell (supply) their currency and buy (demand) baht in exchange. So, the demand for baht is partly determined by the level of exports - the higher the level of exports, the higher the demand for baht. However, people may also demand baht simply because they want to invest in Thailand or because they are speculating to make a profit, as they believe that exchange rates will change. So the demand for sterling arises from:
Exports
Inflows of funds into Thailand
Speculation
The supply of baht comes from people who are selling baht to buy other currencies. We all do that when we travel overseas - we sell baht and buy Euros, $, Yen or whatever. However, we, as tourists, are only a very small part of overall supply of baht. Much of it will come from firms who buy goods and services from overseas (imports), but there may also be outflows of funds and perhaps speculative flows as well. So, the supply of baht arises from:
Imports
Outflows of funds from Thailand
Speculation
When all these transactions are consolidated into a table of international balance of payments, this would become the country’s foreign exchange balance of payments
