Forex market
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The foreign exchange market is a global decentralized market where currencies are bought and sold. It facilitates international trade and investment by allowing participants to transfer purchasing power between countries. The market operates around the clock globally with daily volume of $3.98 trillion. It involves commercial banks trading currencies for themselves and clients which make up 95% of transactions, along with central banks, speculators, hedgers, brokers and arbitragers.
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Forex market
- 2. A.A. The Foreign ExchangeThe Foreign Exchange Market:Market: where moneywhere money denominated in onedenominated in one currency is bought andcurrency is bought and sold with moneysold with money denominated in anotherdenominated in another currency.currency.
- 3. Features of Foreign exchangeFeatures of Foreign exchange market:market: Global marketGlobal market OTC marketOTC market Around the clock marketAround the clock market Currencies tradedCurrencies traded 1-2% transactions are for actual1-2% transactions are for actual trade, rest for speculation.trade, rest for speculation. No physical transfer of moneyNo physical transfer of money
- 4. Exist in the network of informationExist in the network of information system.system. Banks are involved in 95% cases.Banks are involved in 95% cases. Foreign exchange market facilitatesForeign exchange market facilitates trade and investmenttrade and investment
- 5. 5-5-55 Functions of the FOREXFunctions of the FOREX MarketMarket The FOREX market is the mechanism by whichThe FOREX market is the mechanism by which participantsparticipants • Transfer purchasing power between countriesTransfer purchasing power between countries Transfer of purchasing power is necessary becauseTransfer of purchasing power is necessary because international transactions normally involve parties ininternational transactions normally involve parties in countries with different national currencies. Each partycountries with different national currencies. Each party usually wants to deal in its own currency, but theusually wants to deal in its own currency, but the transaction can be invoiced in only one currency.transaction can be invoiced in only one currency. • Obtain or provides credit for international tradeObtain or provides credit for international trade transactionstransactions Because the movement of goods between countriesBecause the movement of goods between countries takes time,takes time, Inventories in transit must be financedInventories in transit must be financed • Minimize exposure to exchange rate riskMinimize exposure to exchange rate risk FOREX markets provide instruments utilized in “hedging”FOREX markets provide instruments utilized in “hedging” or transferring risk to more willing partiesor transferring risk to more willing parties
- 6. MARKET PARTICIPANTSMARKET PARTICIPANTS bank clients (individuals, firms, non-banking financial institutions): all those groups of legal and physical persons that need foreign currency in doing their commercial or investment business commercial banks: the most important group of foreign exchange market participants they buy and sell foreign currencies for their clients and trade for themselves
- 7. MARKET PARTICIPANTSMARKET PARTICIPANTS central banks: foreign exchange market interventions are meant to influence the exchange rate of the domestic currency in a way that is beneficial for the domestic economy and, consequently, for the country it does not necessarily have a profit, it can also have a loss hedgers and speculators: hedgers do not want to take risk while participating in the market, they want to insure themselves against the exchange rate changes speculators think they know what the future exchange rate of a particular currency will be, and they are willing to accept exchange rate risk with the goal of making profit every foreign exchange market participant can behave either as a hedger or as a speculator in the context of a particular transaction
- 8. brokers: agents that connects dealers interested in buying and selling foreign exchange, but does not become an active client in the transaction they provide their client, the bank, with the information about the exchange rates at which banks are willing to buy or sell a particular currency MARKET PARTICIPANTSMARKET PARTICIPANTS arbitragers: they want to earn a profit without taking any kind of risk (usually commercial banks): try to profit from simultaneous exchange rate differences in different markets making use of the interest rate differences that exist in national financial markets of two countries along with transactions on spot and forward foreign exchange market at the same time (covered interest parity)
- 9. SIZE OF THE MARKETSIZE OF THE MARKET Largest in the worldLargest in the world : $3.98 trillion daily: $3.98 trillion daily The market operates round theThe market operates round the clock from Monday through Friday.clock from Monday through Friday.
- 10. SIZE OF THE MARKETSIZE OF THE MARKET Largest in the worldLargest in the world : $3.98 trillion daily: $3.98 trillion daily The market operates round theThe market operates round the clock from Monday through Friday.clock from Monday through Friday.
Editor's Notes
- Transferring the purchasing power The most important function is the transfer of purchasing power from one country to another and from one national currency to another. The purchasing power is transferred through the use of credit instruments. The main credit instrument is used for the transferring the purchasing power is the telegraphic transfer (TT) of the cabled order by one bank (in country A) to its correspondent abroad (in country B) to pay B funds out of its deposit account to its designated account or order. The telegraphic transfer is simply a sort of cheque, which is wired or radioed rather than sent by post. Purchasing power may also be transferred through bank drafts. Provision of credit for foreign trade The foreign exchange market also provides credit for foreign trade. Like all the traders, international trade also requires credit. It takes time to move the goods from seller to purchaser and during this period, the transaction must be financed. When the exporter does not need credit for the manufacture of export goods, credit is necessary for the transit of goods. When the special credit facilities of the foreign exchange market are used, the foreign exchange department of a bank or the bill market is used; the foreign exchange department of the bank or the bill market of one country or the other extends the credit facilities to finance the foreign trade. Furnishing facilities for hedging foreign exchange risks The foreign exchange market by providing facilities of buying and selling at spot or forward exchange, enables the exporters and importers to hedge their exchange risks arising from change in the foreign exchange rate. The forward market in exchange also enables those banks, which are unlikely to run any considerable exchange position to cover their commitments.
- Banks The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago. [edit] Commercial companies An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
- Central banks National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading. The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[7] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia. Hedge funds as speculators About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.