Participants in Forex Market The participants in the foreign exchange market comprise; Corporates Commercial banks Exchange brokers Central banks Corporates: The business houses, international investors, and multinational corporations may operate in the market to meet their genuine trade or investment requirements. They may also buy or sell currencies with a view to speculate or trade in currencies to the extent permitted by the exchange control regulations. They operate by placing orders with the commercial banks. The deals between banks and their clients form the retail segment of foreign exchange market. In India the Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000 permits retention, by resident, of foreign currency up to USD 2,000. Foreign Currency Management (Realization, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 requires a resident in India who receives foreign exchange to surrender it to an authorized dealer: Within seven days of receipt in case Continue reading
Forex Investments
Currency Arbitrage – Definition and Examples
Arbitrage traditionally has been defined as the purchase of assets or commodities on one market for immediate resale on another in order to profit from a price discrepancy. In recent years however arbitrage has been used to describe a broader range of activities. The concept of arbitrage is of particular importance in International finance because so many of the relationships between domestic and international financial markets, exchange rates, interest rates and inflation rates depend on arbitrage for their existence. In fact it is the process of arbitrage that ensures market efficiency. The purchase of currencies on one market for immediate resale on another in order to profit from the exchange rate differential is known as currency arbitrage. If perfect conditions prevail in the market, the exchange rate for a currency should be the same in all centers. Until recently, the pervasive practice among bank dealers was to quote all currencies Continue reading
How Options are Used to Cover Foreign Exchange Risks?
Currency options provide corporate treasurer another tool for hedging foreign exchange risks arising out of firms operations. Unlike forward contract, options allow the hedger to gain from favorable exchange rate movements, while been unprotected from unfavorable movements. However forward contracts are costless while options involve up front premium cost. Examples are: a) Hedging a Foreign Currency with calls. In late February an American importer anticipates a yen payment of JYP 100 million to a Japanese supplier sometime late in May. The current USD/JYP spot is 0.007739 (which implies a JYP/USD rate of 129.22.). A June yen call option on the PHLX, with strike price of $0.0078 per yen is available for a premium of 0.0108 cents per yen or $0.000108 per yen. Each yen contract is for JPY 6.25 million. Premium per contract is therefore: $(0.000108 * 6250000) = $675. The firm decides to purchase 16 calls for a premium Continue reading
Settlement of Transactions in Foreign Exchange Markets
Foreign exchange markets make extensive use of the latest developments in telecommunications for transmitting as well settling foreign exchange transaction, Banks use the exclusive network SWIFT to communicate messages and settle the transactions at electronic clearing houses such as CHIPS at New York. SWIFT SWIFT is a acronym for Society for Worldwide Interbank Financial Telecommunications, a co operative society owned by about 250 banks in Europe and North America and registered as a co operative society in Brussels, Belgium. It is a communications network for international financial market transactions linking effectively more than 25,000 financial institutions throughout the world who have been allotted bank identified codes. The messages are transmitted from country to country via central interconnected operating centers located in Brussels, Amsterdam and Culpeper, Virginia. The member countries are connected to the centre through regional processors in each country. The local banks in each country reach the regional processors Continue reading
Exchange Rate Factors – Factors Affecting Exchange Rates
When trade takes place between the residents of two countries, the two countries being a sovereign state have their own set of regulations and currency. The exporter would like to get the payment in the currency of his own country, the importer can pay only in the currency of the importers country. This creates a need for the conversion of the currency of importer’s into that of the exporter’s country. Foreign exchange is the mechanism by which the currency of one country is gets converted into the currency of another country. The conversion is done by banks and financial institutions, who deals with foreign exchange business. When one currency is converted into another, there must be some basis in effecting the conversion. The basis by which the currency unit of one country gets converted into currency units of another country is known as foreign exchange rate. Foreign exchange rate is Continue reading
Factors Influencing Foreign Exchange Rates
Foreign exchange rates are extremely volatile and it is incumbent on those involved with foreign exchange – either as a purchaser, seller, speculator or institution – to know what causes rates to move. Actually, there are a variety of factors – market sentiment, the state of the economy, government policy, demand and supply and a host of others. The more important factors that influence foreign exchange rates are discussed below: Strength of the Economy :The strength of the economy affects the demand and supply of foreign currency. If an economy is growing fast and is strong it will attract foreign currency thereby strengthening its own. On the other hand, weaknesses result in an outflow of foreign exchange. If a country is a net exporter (as were Japan and Germany), the inflow of foreign currency far outstrips the outflow of their own currency. The result is usually a strengthening in its value. Continue reading