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THE HISTORY OF IT IN TRAVEL .

Information Technology & Tourism is the first scientific journal dealing with the
exciting relationship between information technology and tourism. Information
and communication systems embedded in a global net have profound influence
on the tourism and travel industry. Reservation systems, distributed multimedia
systems, highly mobile working places, electronic markets, and the dominant
position of tourism applications in the Internet are noticeable results of this
development. And the tourism industry poses several challenges to the IT field
and its methodologies. Advances in the use and development of tools,
technologies, and methodologies that have facilitated the efficient netting of
information and communication systems in tourism and travel are to be
presented and discussed within this journal. Information Technology & Tourism
aims to contribute to the process of theory building, and hence to the
advancement of research and scholarship in this growing field. As an
interdisciplinary journal it can be placed between information technology and
tourism research where both fields may influence each other. The need for such
a dialogue and scholarship can be reasoned by the growing number of TIS
conferences worldwide that each year attract a very large and growing audience.
Information Technology & Tourism focuses on academia as well as industry. It
will feature both empirical case studies and technical-theoretical papers looking
at tourism from an IT point of view and at IT from a tourism point of view, a
treatment quite attractive for researchers in both fields

332 DAYS AGO
A brief history of travel technology from its
evolution to looking at the future

It is said that necessity is the mother of all invention and we need look no further than the
travel industry to see this proverb in practice.
Since the beginning of recorded history, the travel and hospitality industries have faced
challenges. Yet many of these challenges still exist even today.
Travel technology has changed over the years driven primarily by the stakeholders most
affected by the use of the technology. I believe we have seen four distinct stages dating from
the 1400s to the present day.
These stages are:
Supply creation
Supply management
Sales and distribution
Advanced discovery
Before we can look at what the future holds for travel technology, we have to look to its past to
determine its path forward.
Supply creation
-
The very first recorded incident of overbooking and the subsequent denial of service to a guest
can be attributed to the case of the pregnant woman and her husband who, after a long journey,
were forced to look for alternative accommodation because the inn at which they wished to stay
was already full. The wife gave birth to their child in the stable next door, and well, you know the
rest. But how different that story could have been, if they had booked their accommodations in
advance or used a last minute booking application like HotelTonight? Think of the long term
marketing opportunity that Innkeeper missed out on. Instead, the innkeeper is vilified. It isnt
until the 1400s that we see a formalization of the hospitality industry when England and France
(not at the same time) passed legislation that required hotels and inns to keep guest registries.
Essentially, this was the first instance of customer relationship management in the hospitality
space. During that time, over 600 inns were registered in England, primarily located along
arterial coach routes and highways. Interestingly, this formalization and centralized registry of
Inns and hotels also made it possible to create the first printed guidebooks for travellers. The
industrial revolution, starting in approximately 1760, resulted in the expansion of rail
infrastructure across Europe and North America. This was the beginning of the era of mass
transportation and as a result, there was a boom in the development of high capacity hotels
centred around city cores. At the same time, however, there was a gradual decline in highway
coach houses and inns as people shifted away from slower horse drawn coaches and opted for
the faster, and in most cases, much safer rail transportation. In 1841 Thomas Cook, a Baptist
preacher, struck a deal with the Midland Railway to organize the transportation of 540 members
of his temperance society. The railway would offer a train ticket and lunch for the cost of 1
shilling or a current day equivalent value of approximately $70. For selling these packaged
tickets, Cook received a commission from the railway. Cook effectively became the first
recorded travel agent and created the first publicly available packaged excursion. Cooks
success would go to define two important segments of the travel industry; travel agencies (and
tour operators) as well as the packaged holiday segment. In 1845, Cook arranged travel for
165,000 people without the aid of any technology. Consider for a moment, that the ball point
pen had not been invented yet, the telegraph was not yet commercially available in the UK until
1846 and the telephone would not be patented for another thirty years. Cook managed all that
customer and booking data with nothing but a fountain pen and a paper ledger. The thought of
managing that much information without the use of technology seems ludicrous, and yet, it was
done. But even given the pain that Cook must have felt managing that many customers in 1841,
the pain didnt fully materialize until the rapid growth of the airlines which began in the 1920s.
Many of the brands we are familiar with today such as the Queensland and Northern Territory
Aerial Service, also known as Qantas, Delta, American Airways (todays American Airlines), and
PanAm were formed at this time. An era of commercial aviation had begun. But airplanes were
not the only form of transportation that was becoming popular. Cars were now being mass
produced and, along with the newly available vehicles, schemes to monetize them also
developed. Joe Saunders, an entrepreneur from Omaha, started an Automobile for Hire
business that is recognized as being the first recorded car rental company. Later that decade
John Hertz would purchase one of Saunders competitors and form the Hertz Drive-Ur-Self
System, which he eventually sold to General Motors. Air transportation in the 1930s
experienced rapid growth as new routes opened up as a result of government investment in
airports and infrastructure. With the arrival of World War II, many of the airlines benefited from
government contracts to transport troops and goods all over the World. Coincidentally, the
increase in air transportation opened up opportunities for companies to combine two modes of
transportation together. In 1946 Avis Rent a Car started business as the first airport rental car
service.
Supply management
During this period of rapid growth, the airlines, without the advantage of computerization were
forced to systematize their airline operations. The systems they developed included many of the
trip components that are still in use today. But systemization could only do so much in terms of
streamlining inventory and passenger management challenges. In the early 1950s airlines
began to look seriously at tools for automating the booking process which, at the time, would
take airline agents upwards of 90 minutes per customer booking to complete. The jet age was
rapidly approaching and with it, the prospect of having to process millions of new passengers by
hand. In 1952, American Airlines installed the Magnetronic Reservisor, an electromechanical
system of vacuum tubes and a magnetic storage drum that allowed the airline to store seat
availability on a centralized platform. Although the reservisor helped to reduce the time required
to check availability and could store 31 days of availability for over 2,000 flights, it was still a
largely manual process to book seats and required a reservisor agent to query the system.
Around the same time, TCA (Trans Canada Airlines) in conjunction with the University of
Toronto and Ferranti Systems developed the worlds first computerized reservation system,
known as the Reservec, which stood for Reservations Electronically Controlled. American
Airlines, which was aware of the early Reservec success, invested in the development of their
own computerized reservation system in partnership with IBM. The Sabre system was launched
two years later at a cost of almost ten times that of the competing Reservec system. Despite
being a superior technology, Reservec didnt see the same commercial success as Sabre
because it was not able to effectively enter the IBM-controlled US market. The success,
however, of both Reservec and Sabre promoted other airlines to develop their own
computerized reservation platforms. In a very short period the Deltamatic, DATAS, Apollo, and
PARS were up and running in the 1960s.
Sales and distribution
On a parallel track with the growth of the airlines was the growth of the travel agencies. Many of
whom had become important sales and booking channels for the airlines. As airline routes and
booking processes had become more complicated, travel agents had become a more popular
method for consumers to book their airline tickets. But travel agents wanted more access to
airline schedules and fares so they could sell tickets more efficiently and automate their side of
the booking process. This could only be accomplished with direct computerized access to the
airlines reservation systems. American Airlines, concerned by the potential growing influence of
travel agents, proposed the creation of centralized computer reservation system that could act
as a clearing house for US travel. Other airlines opposed the idea and eventually, beginning
with Delta, reservation terminals were installed in travel agencies across the US. The race to
own the agent desktop had begun. Opening up scheduling and fares to agencies proved to be a
good move for the airlines. For some, primarily the airlines who owned their own GDSs, the
temptation to manipulate displays became too strong. After finding that American Airlines had
purposefully biased search results in its Sabre reservation system In 1984, the US government
introduced legislation to ban screen bias. But this legislation has proven to be less than
effective. Twenty years later, the airlines, GDSs, and now online travel agencies are still being
reprimanded by governments worldwide for this practice. During the 1980s, other GDS systems
were being developed. European airlines reluctant to use the US-centric Sabre system banded
together to create Amadeus. Meanwhile, Sabre in partnership with the growing computer
network services business, Compuserve, provided the first known instance of online bookings
for both airlines and hotels via EAASY Sabre. The increase in travel agent hotel reservations
and the advent of smaller and more powerful desktop computer systems prompted the creation
of hotel reservation systems that could be conveniently located at the hotel front desk. Fidelio
launched its first property management and hotel reservation system in 1987. Thanks in part to
the success of the commercial internet in the early 1990s, many leading travel brands began
developing websites, some with online reservation capabilities. In 1995, Viator Systems (now
Viator) launched its travel technology business with a focus on providing tours and excursion
bookings via the world wide web. In 1996, a small division of Microsoft called Expedia launched
its website offering online bookings for air, hotels, and car rentals. Later that year, Travelocity,
owned by Sabre, launched its own site to help the do-it-yourself traveler. Following on the
growing trend of helping travelers book their own holidays, Priceline with its Name your own
price opaque pricing model launched. It later extended the pricing model to include cars, home
loans, and even second hand goods but ultimately reverted back to their successful hotel
model. The airlines, in anticipation of the increased connectivity demands that internet
technologies afforded, came together to develop an industry standard for messaging. The
resulting messages were to be managed and updated by the newly created OpenTravel
Alliance (the first OpenTravel messages were published in 2001). Coincidentally, in the same
year, five of the six major airlines joined, still on some apparent mission of cooperation, joined
forces to create their own online travel agency. Despite protests of unfair competition and
potential collusion brought forth by the existing online travel agencies and GDSs, Orbitz was
launched.
Advanced discovery
As the growth of the Internet accelerated and the demise of the first dot com era subsided, new
opportunities emerged to provide travelers with more information about the hotels they were
booking in increasing numbers online. Though travel forums and bulletin boards were around,
there was no one forum that could provide the depth and recommendations on hotels that
consumers were looking for. In 2004, TripAdvisor launched in the hope of filling that gap. In
addition to providing consumers with access to reviews and recommendations, it became
apparent that consumers were shopping across multiple websites looking for deals on airline
fares. Kayak, whose co-founders had previously worked at Orbitz and Expedia, allowed
customers to find airline pricing results across multiple sites with one search. The model, which
has remained relatively unchanged, is known today as the metasearch model and is one of the
fastest growing search models for airfare and now hotel bookings. The mid-2000s was also a
time for lesser known segments of the travel industry to begin their climb out of obscurity. The
vacation rental market, led by Homeaway in 2004, has become one of the fast growing
segments of the travel market, helped in many ways by the ubiquity of the web. As managed
data centres and dedicated servers were replaced with virtual private servers and cloud hosting,
more and more traditionally desktop applications were moved online. Software as a service
businesses like Rezgo, TourCMS, and Guestcentric launched with the promise of helping small
businesses such as long tail operators and boutique hotels manage their services and open up
new sources or supply without the capital expenditures traditionally associated with dedicated
reservation services. Continued advancements in internet connectivity also meant greater
access to web content on mobile devices. For years the travel industry had been toying with
technologies like WAP and cHTML, creating websites that were compatible with early
smartphone technologies like those from Blackberry and Nokia. 2008 marked a major milestone
is the long awaited mobile revolution. Apple, after the very successful launch of its first iPhone
the previous year, made the iOS SDK available for third party developers. The move would
prove to be a pivotal point in the history of mobile development, allowing travel companies to
create dedicated applications designed specifically for the mobile consumer. 2008 also marked
the first of a new trend of websites that would shake up the existing travel landscape and cause
local governments around the world to take a second look at their housing policies. Airbnb, the
first of many Peer-to-Peer marketplaces launched providing home-owners (and renters) with a
place to list and rent out their spare rooms to strangers. Although other similar marketplaces,
such as Couchsurfing, had already been around for a few years, they tended to be focused on
niche markets such as the backpacker or budget traveler. As with any new platform, it is not
unusual to see many existing travel businesses develop mobile applications in order to take
advantage of the marketing opportunities. Often times, though, it takes a bit of time for
companies to form that are dedicated entirely to the platform. One such company, HotelTonight,
launched in 2010 around a last-minute mobile only model. The company raised $35 million
shortly after its launch proving that a mobile-only focus could attract significant funding. The
belief is that many more mobile only business models will emerge over the next few years,
though HotelTonight is viewed as one of the most successful to date. In 2011, the internet was
abuzz with controversy surrounding the proposed acquisition of ITA Software by Google.
Fairsearch, a group made up of online travel agencies, metasearch companies, and competing
airline reservation systems, looked to block the acquisition citing anti-trust concerns and unfair
competition. Surprisingly, the airlines were not part of this protest since they stood to gain from
the direct booking links that Google intended to include in their Google Flights service. Though
the flights project has failed to have any material impact on the original members of the
Fairsearch, Googles forays into both flight and hotel search have been closely scrutinized by
both competitors and government agencies. Of course, a discussion on travel technology would
not be complete without some mention of the impact of social media on travel. In 2012
Facebook reached one bllion active monthly users marking a major milestone for the eight year
old company. Recent studies have shown however, that traffic from social networks is quite
small, so the influence of these networks is still quantitatively unknown.
Application of Information Technology (IT) has revolutionized the
functioning of business all over the world. Its impact has been felt mostly in
the information dependent industries. Tourism is one such industry. This
study examines the penetration of Information Technology in the context of
Tourism Management. This study has found differences in usage of IT and
attitudes towards its dependence upon size of tourism organizations. In the
case of smaller companies, the low cost access to Internet and on-line
systems was viewed as an expensive investment. Tour operators, travel
agents and direct tourism suppliers can increasingly use information
technologies to communicate destination images to prospective
consumers. The advent of Computerized Reservation Systems (CRS)
means that travel products can be marketed directly to the potential
consumer. This paper also investigates about different applications of
information technology like Virtual Reality (VR) simulations, e-payments,
CRS that can be used to develop tourism market. Although VR technology
is rather primitive at present, it is argued that through its ability for
interactivity, consumers will be able to experience a destination without
leaving their origin destination.

Leisure, or free time, is time spent away from business, work, domestic chores,
and education. It also excludes time spent on necessary activities such
as sleeping.
The distinction between leisure and unavoidable activities is not a rigidly defined
one, e.g. people sometimes do work-oriented tasks forpleasure as well as for
long-term utility. A distinction may also be drawn between free time and leisure.
For example, Situationist International maintains that free time is illusory and
rarely free; economic and social forces appropriate free time from the individual
and sell it back to them
[clarification needed]
as the commodity known as
"leisure".
[2]
Certainly most people's leisure activities are not a completely free
choice, and may be constrained by social pressures, e.g. people may be coerced
into spending time gardening by the need to keep up with the standard of
neighbouring gardens.
Another concept of leisure is social leisure, which involves leisurely activities in a
social settings, such as extracurricular activities, e.g. sports, clubs.
Leisure studies is the academic discipline concerned with the study and analysis
of leisure.
GI Card Game, Watercolor by James Pollock, U. S. Army Vietnam Combat Artists Team IV
(CAT IV 1967). During the Vietnam War soldiers waiting to go on patrol would sometimes spend
their leisure time playing cards. Courtesy National Museum of the United States Army.
Time available for leisure varies from one society to the next, although
anthropologists have found that hunter-gatherers tend to have significantly more
leisure time than people in more complex societies. As a result, band
societies such as the Shoshone of the Great Basincame across as extraordinarily
lazy to European colonialists.
[3]

Workaholics are those who work compulsively at the expense of other activities.
They prefer to work rather than spend time socializing and engaging in other
leisure activities.
Men generally have more leisure time than women. In Europe and the United
States, adult men usually have between one and nine hours more leisure time
than women do each week.
[4]

Adolescents[edit]
Free time has potential for youth development, which is influenced by parental
attitudes of interest and control, mediated by adolescent motivational style.
[5]

Social Leisure[edit]
Social leisure involves leisurely activities in a social settings, such as
extracurricular activities, e.g. sports, clubs. There are many benefits that come
from social leisure, such as the development of character, self-identity, and
understanding of a communal setting or hierarchy. One key ingredient of social
leisure that tends to be overlooked is the concept of mealtime being an important
part of social leisure. It is during mealtimes where many individuals develop their
social skills and character that defines an individual.
The relation between social leisure and mealtime, which is essentially the act
accompanied with food, is uncanny. Both are used as a form of socialization,
both develop character as well as create development in youth, and both help
create social capital, these similarities are what make food a form a social
leisure. Food, the main ingredient in mealtime, also shares this similar quality of
self-identity through development and socialization, making food another positive
form of social leisure.


Billing and Settlement Plan

Billing and Settlement Plan (BSP) (also known as "Bank Settlement Plan") is
an electronic billing system designed to facilitate the flow
of data and funds between travel agencies and airlines. The advantage of such
an intermediary organization is that instead of each travel agency having an
individual relationship with each airline, all of the information is consolidated
through the BSP.
BSP's are organized on a local basis, usually one per country. However there are
some BSP's which cover more than one country (for example the Nordics).
The International Air Transport Association states that at the close of 2009, there
were 86 BSP's covering more than 160 countries worldwide, while at the close of
2011, there were 88 BSPs, covering 176 countries and territories serving about
400 airlines, with gross sales processed amounting to USD 249 billion.
[1]

Travel agents (TA) are usually required to be accredited by either Airlines
Reporting Corporation (ARC), when they are located in the US, or BSP outside of
the US, in order to issue airline reservations through GDS.
[2]

Billing settlement plan (BSP)
The Billing Settlement Plan (BSP) is a standardised system for airlines and agents,
providing them with a simplified approach to the selling, reporting and administration of
passenger air transportation. It is established under the general jurisdiction of the
Passenger Agency Conference (PAConf), delegated to the BSP Committee (BSPC) and
co-ordinated by the Agency Administrator/Plan Management.
Agents are able to:

Issue neutral Standard Traffic Documents (STD) on behalf of all BSP Airlines, in accordance
with their Sales Agency Agreements.
Report with a minimum of effort, their sales made on behalf of BSP Airlines to a central EDP
Centre, which produces one billing for each Agent's sales in a given period, requiring only
one remittance per Agent and per period.
Computes the division of the Agents' remittances to each BSP Airline, allowing one single
settlement, within an agreed time frame.
Benefits of the BSP
Simplification
The Agent is assured of a steady and pre-determined supply of neutral Standard Traffic
Documents. The Agent uses the same Standard Traffic Documents on behalf of all BSP
Airlines. The Agent issues one single sales report to one central point and effects one
single remittance
Savings
Training of Agents is simpler and shorter, due to one set of standard procedures.
Centralisation of the processing and of the distribution of STDs reduces costs and
allows for better control. Investigations by BSP Manager, who is empowered to take
immediate action on behalf of BSP Airlines, allows for faster solutions to problems.
Control
The control system embodied in the BSP presents the following advantages: Billing and
billing analyses of uniform presentation for Airlines and for Agents are rapidly produced
by a neutral billing/collection agency. Airlines and Agents benefit from having the
monitoring of Irregularity and Default effected by a neutral BSP Manager.
Automation Potential
Automation of back office functions is rendered by a single accounting system. BSP
enables and encourages the use of the most modern automated ticket issuing devices,
thereby economising in time and money, whilst presenting the customer with an
attractive and legible ticket.
How it works
It is a strategic move for AirAsia to participate in the Billing Settlement Plan (BSP) and
we are proud to provide this facility as an additional payment option for travel agents.

Travel agents, who are already participating in BSP is encouraged to register with us as
you can further utilise this ultimate facility through our internet booking protocol Sky
Agent. The registration is a simple process. From the drop down menu of other
services, go to travel agent choose register now and it will prompt you a registration
page menu. Please fill up all the blanks and press submit button. AirAsia will verify the
data you have submitted. Once your application is successful, you will receive an
appointment letter with a master user ID and password.

Travel agents, who are not participating in BSP, can still register with AirAsia and enjoy
the benefits of Sky Agent. The payment options will be limited to credit card, direct debit
and pre-payment AG only.

For those BSP travel agents that have registered with AirAsia need not to register
again. However, you will have to advise us of your interest in the scheme and we will
arrange for the cutover into the scheme with a pre set BSP allotment level for you to
utilise. After cutover, you will be able to see the BSP Allotment option when you are in
the payment option mode. The BSP allotment amount will be set by our office and the
amount will be based on your current bank guarantee against your sales performance.

As AirAsia is a low fare, ticket-less airline, we will not be utilising the STD and CIP as
provided for in BSP. Our participation will be confined to the billing and settlement part
of the BSP scheme. Once a reservation and payment has been made through our
Skyagent system with the BSP payment option, the transaction will be captured by our
system and at the end of each day, an electronic file will be generated and sent to BSP
data processing centre for their processing. In accordance to the respective billing
cycle, the travel agent will receive their billing and payment will be made to the clearing
bank accordingly by the travel agent. For AirAsia sales, the transaction will be captured
by BSP as an Agency Debit Memo (ADM) and not as a ticket issue in the conventional
way. The data that will be available in the ADM field will be an ADM number, total
payable amount and PNR reference.

Sabre Travel Network (STN) is a travel technology company, serving travel
agencies and corporations. It is a division of Sabre Holdings. Sabre Travel
Network began when the Sabre computer reservations system, also known as
a Global Distribution System(GDS) was installed in Briarcliff Manor, New York in
1960. It began as the reservations system for American Airlines. Its parent
company, Sabre Holdings, spun off from American as The Sabre Group on
March 15, 2000. Today, Sabre Travel Network software connects more than
370,000 travel professionals to more than 400 airlines, 100,000 hotels, 25 car
rental brands, 50 rail providers, 13 cruise lines and other global travel suppliers.
More than 300 million people purchase airline tickets through this channel
annually.
Sabre Travel Network brands:


Definition of 'Foreign Exchange'

The exchange of one currency for another, or the conversion of
one currency into another currency. Foreign exchange also refers
to the global market where currencies are traded virtually
around-the-clock. The term foreign exchange is usually
abbreviated as "forex" and occasionally as "FX."
Investopedia explains 'Foreign Exchange'

Foreign exchange transactions encompass everything from the
conversion of currencies by a traveler at an airport kiosk to
billion-dollar payments made by corporate giants and
governments for goods and services purchased overseas.
Increasing globalization has led to a massive increase in the
number of foreign exchange transactions in recent decades. The
global foreign exchange market is by far the largest financial
market, with average daily volumes in the trillions of dollars.
Foreign exchange market

The foreign exchange market (forex, FX, or currency market) is a global
decentralized market for the trading of currencies. The main participants in this
market are the larger international banks. Financial centers around the world
function as anchors of trading between a wide range of multiple types of buyers
and sellers around the clock, with the exception of weekends. The foreign
exchange market determines the relative values of different currencies.
[1]

The foreign exchange market works through financial institutions, and it operates
on several levels. Behind the scenes banks turn to a smaller number of financial
firms known as dealers, who are actively involved in large quantities of foreign
exchange trading. Most foreign exchange dealers are banks, so this behind-the-
scenes market is sometimes called the interbank market, although a few
insurance companies and other kinds of financial firms are involved. Trades
between foreign exchange dealers can be very large, involving hundreds of
millions of dollars.
[citation needed]
Because of the sovereignty issue when involving
two currencies, Forex has little (if any) supervisory entity regulating its actions.
The foreign exchange market assists international trade and investments by
enabling currency conversion. For example, it permits a business in the United
States to import goods from the European Union member states,
especially Eurozone members, and payeuros, even though its income is
in United States dollars. It also supports direct speculation and evaluation relative
to the value of currencies, and the carry trade, speculation based on the interest
rate differential between two currencies.
[2]

In a typical foreign exchange transaction, a party purchases some quantity of one
currency by paying for some quantity of another currency. The modern foreign
exchange market began forming during the 1970s after three decades of
government restrictions on foreign exchange transactions (the Bretton Woods
system of monetary management established the rules for commercial and
financial relations among the world's major industrial states after World War II),
when countries gradually switched to floating exchange rates from the
previous exchange rate regime, which remained fixed as per the Bretton Woods
system.
The foreign exchange market is unique because of the following characteristics:
its huge trading volume representing the largest asset class in the world
leading to high liquidity;
its geographical dispersion;
its continuous operation: 24 hours a day except weekends, i.e., trading from
22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York);
the variety of factors that affect exchange rates;
the low margins of relative profit compared with other markets of fixed
income; and
the use of leverage to enhance profit and loss margins and with respect to
account size.
As such, it has been referred to as the market closest to the ideal of perfect
competition, notwithstanding currency intervention by central banks.
According to the Bank for International Settlements,
[3]
the preliminary global
results from the 2013 Triennial Central Bank Survey of Foreign Exchange and
OTC Derivatives Markets Activity show that trading in foreign exchange markets
averaged $5.3 trillion per day in April 2013. This is up from $4.0 trillion in April
2010 and $3.3 trillion in April 2007. Foreign exchange swaps were the most
actively traded instruments in April 2013, at $2.2 trillion per day, followed by spot
trading at $2.0 trillion.
According to the Bank for International Settlements,
[4]
as of April 2010, average
daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a
growth of approximately 20% over the $3.21 trillion daily volume as of April 2007.
Some firms specializing on foreign exchange market had put the average daily
turnover in excess of US$4 trillion.
[5]

The $3.98 trillion break-down is as follows:
$1.490 trillion in spot transactions
$475 billion in outright forwards
$1.765 trillion in foreign exchange swaps
$43 billion currency swaps
$207 billion in options and other products
Contents
[hide]
1 History
o 1.1 Ancient
o 1.2 Medieval and later
o 1.3 Early modern
o 1.4 Modern to post-modern
1.4.1 After WWII
1.4.2 Markets close
1.4.3 After 1973
2 Market size and liquidity
3 Market participants
o 3.1 Commercial companies
o 3.2 Central banks
o 3.3 Foreign exchange fixing
o 3.4 Hedge funds as speculators
o 3.5 Investment management firms
o 3.6 Retail foreign exchange traders
o 3.7 Non-bank foreign exchange companies
o 3.8 Money transfer/remittance companies and bureaux de change
4 Trading characteristics
5 Determinants of exchange rates
o 5.1 Economic factors
o 5.2 Political conditions
o 5.3 Market psychology
6 Financial instruments
o 6.1 Spot
o 6.2 Forward
o 6.3 Swap
o 6.4 Futures
o 6.5 Option
7 Speculation
8 Risk aversion
9 Carry trade
10 Forex signals
11 See also
12 References
13 External links
History[edit]
Ancient[edit]
Currency trading and exchange first occurred in ancient times.
[6]
Money-changing
people, people helping others to change money and also taking a commission or
charging a fee were living in the times of the Talmudic writings (Biblical times).
These people (sometimes called "kollybists") used city-stalls, at feast times the
temples Court of the Gentilesinstead.
[7]
Money-changers were also in more
recent ancient times silver-smiths and/or gold-smiths.
[8]

During the fourth century, the Byzantium government kept a monopoly on the
exchange of currency.
[9]

Currency and exchange was also a vital and crucial element of trade during the
ancient world so that people could buy and sell items like food, pottery and raw
materials.
[10]
If a Greek coin held more gold than an Egyptian coin due to its size
or content, then a merchant could barter fewer Greek gold coins for more
Egyptian ones, or for more material goods. This is why, at some point in their
history, most world currencies in circulation today had a value fixed to a specific
quantity of a recognized standard like silver and gold.
Medieval and later[edit]
During the fifteenth century the Medici family were required to open banks at
foreign locations in order to exchange currencies to act on behalf
of textile merchants.
[11][12]
To facilitate trade the bank created the nostro (from
Italian translated "ours") account book which contained two columned entries
showing amounts of foreign and local currencies, information pertaining to the
keeping of an account with a foreign bank.
[13][14][15][16]
During the 17th (or 18th )
century Amsterdam maintained an active forex market.
[17]
During 1704 foreign
exchange took place between agents acting in the interests of the nations of
England and Holland.
[18]

Early modern[edit]
Alex. Brown & Sons traded foreign currencies exchange sometime about 1850
and was a leading participant in this within U.S.A.
[19]
During 1880, J.M. do
Esprito Santo de Silva (Banco Esprito Santo) applied for and was given
permission to begin to engage in a foreign exchange trading business.
[20][21]

The year 1880 is considered by at least one source to be the beginning of
modern foreign exchange, significant for the fact of the beginning of the gold
standard during the year.
[22]

Prior to the first world war there was a much more limited control of international
trade. Motivated by the outset of war countries abandoned the gold standard
monetary system.
[23]

Modern to post-modern[edit]
From 1899 to 1913, holdings of countries' foreign exchange increased at an
annual rate of 10.8%, while holdings of gold increased at an annual rate of 6.3%
between 1903 and 1913.
[24]

At the time of the closing of the year 1913, nearly half of the world's foreign
exchange was conducted using the Pound sterling.
[25]
The number of foreign
banks operating within the boundaries of London increased in the years from
1860 to 1913 from 3 to 71. In 1902 there were altogether two London foreign
exchange brokers.
[26]
In the earliest years of the twentieth century trade was most
active in Paris, New York and Berlin, while Britain remained largely uninvolved in
trade until 1914. Between 1919 and 1922 the employment of foreign exchange
brokers within London increased to 17, in 1924 there were 40 firms operating for
the purposes of exchange.
[27]
During the 1920s the occurrence of trade in
London resembled more the modern manifestation, by 1928 forex trade was
integral to the financial functioning of the city. Continental exchange controls,
plus other factors, in Europe and Latin America, hampered any attempt at
wholesale prosperity from trade for those of 1930's London.
[28]

During the 1920s, the Kleinwort family were known to be the leaders of the
foreign exchange market; while Japheth, Montagu & Co., and Seligman still
warrant recognition as significant FX traders.
[29]

After WWII[edit]
After WWII, the Bretton Woods Accord was signed allowing currencies to
fluctuate within a range of 1% to the currencies par.
[30]
In Japan the law was
changed during 1954 by the Foreign Exchange Bank Law, so, the Bank of Tokyo
was to become, because of this, the centre of foreign exchange by September of
that year. Between 1954 and 1959 Japanese law was made to allow the
inclusion of many more Occidental currencies in Japanese forex.
[31]

U.S. President Richard Nixon is credited with ending the Bretton Woods Accord
and fixed rates of exchange, eventually bringing about a free-floating currency
system. After the ceasing of the enactment of the "Bretton Woods Accord" during
1971,
[32]
the Smithsonian Agreement allowed trading to range to 2%. During
196162, the amount of foreign operations by the U.S. Federal Reserve was
relatively low.
[33][34]
Those involved in controlling exchange rates found the
boundaries of the Agreement were not realistic and so ceased this in March
1973, when sometime afterward none of the major currencies were maintained
with a capacity for conversion to gold, organisations relied instead on reserves of
currency.
[35][36]
During 1970 to 1973 the amount of trades occurring in the market
increased three-fold.
[37][38][39]
At some time (according to Gandolfo during
FebruaryMarch 1973) some of the markets' were "split", so a two tier currency
market was subsequently introduced, with dual currency rates. This was
abolished during March 1974.
[40][41][42]

Reuters introduced during June 1973 computer monitors, replacing the
telephones and telex used previously for trading quotes.
[43]

Markets close[edit]
Due to the ultimate ineffectiveness of the Bretton Woods Accord and the
European Joint Float the forex markets were forced to close sometime during
1972 and March 1973.
[44][45]
The very largest of all purchases of dollars in the
history of 1976 was when the West German government achieved an almost 3
billion dollar acquisition (a figure given as 2.75 billion in total by The Statesman:
Volume 18 1974), this event indicated the impossibility of the balancing of
exchange stabilities by the measures of control used at the time and the
monetary system and the foreign exchange markets in "West" Germany and
other countries within Europe closed for two weeks (during February and, or,
March 1973. Giersch, Paqu, & Schmieding state closed after purchase of "7.5
million Dmarks" Brawley states "... Exchange markets had to be closed. When
they re-opened ... March 1 " that is a large purchase occurred after the
close).
[46][47][48][49]

After 1973[edit]
The year 1973 marks the point to which nation-state, banking trade and
controlled foreign exchange ended and complete floating, relatively free
conditions of a market characteristic of the situation in contemporary times began
(according to one source),
[50]
although another states the first time a currency
pair were given as an option for U.S.A. traders to purchase was during 1982, with
additional currencies available by the next year.
[51][52]

On 1 January 1981, as part of changes beginning during 1978, the People's
Bank of China allowed certain domestic "enterprises" to participate in foreign
exchange trading.
[53][54]
Sometime during the months of 1981 the South Korean
government ended forex controls and allowed free trade to occur for the first
time. During 1988 the countries government accepted the IMF quota for
international trade.
[55]

Intervention by European banks especially the Bundesbank influenced the forex
market, on February the 27th 1985 particularly.
[56]
The greatest proportion of all
trades world-wide during 1987 were within the United Kingdom, slightly over one
quarter, with the U.S. of America the nation with the second most places involved
in trading.
[57]

During 1991 the republic of Iran changed international agreements with some
countries from oil-barter to foreign exchange.
[58]

See also: History of Retail foreign exchange platform
Market size and liquidity[edit]


Main foreign exchange market turnover, 19882007, measured in billions of USD.
The foreign exchange market is the most liquid financial market in the world.
Traders include large banks, central banks,institutional investors,
currency speculators, corporations, governments, other financial institutions, and
retail investors. The average daily turnover in the global foreign exchange and
related markets is continuously growing. According to the 2010 Triennial Central
Bank Survey, coordinated by the Bank for International Settlements, average
daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).
[4]
Of this
$3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in
outright forwards, swaps and other derivatives.
In April 2010, trading in the United Kingdom accounted for 36.7% of the total,
making it by far the most important centre for foreign exchange trading. Trading
in the United States accounted for 17.9% and Japan accounted for 6.2%.
[59]

In April 2013, for the first time, Singapore surpassed Japan in average daily
foreign-exchange trading volume with $383 billion per day. So the rank became:
the United Kingdom (41%), the United States (19%), Singapore (5.7)%, Japan
(5.6%) and Hong Kong (4.1%).
[60]

Turnover of exchange-traded foreign exchange futures and options have grown
rapidly in recent years, reaching $166 billion in April 2010 (double the turnover
recorded in April 2007). Exchange-traded currency derivatives represent 4% of
OTC foreign exchange turnover. Foreign exchange futures contracts were
introduced in 1972 at the Chicago Mercantile Exchange and are actively traded
relative to most other futures contracts.
Most developed countries permit the trading of derivative products (like futures
and options on futures) on their exchanges. All these developed countries
already have fully convertible capital accounts. Some governments of emerging
economies do not allow foreign exchange derivative products on their exchanges
because they have capital controls. The use of derivatives is growing in many
emerging economies.
[61]
Countries such as Korea, South Africa, and India have
established currency futures exchanges, despite having some capital controls.
Top 10 currency traders
[62]

% of overall volume, May 2014
Rank Name Market share
1 Citi 16.04%
2 Deutsche Bank 15.67%
3 Barclays Investment Bank 10.91%
4 UBS AG 10.88%
5 HSBC 7.12%
6 JPMorgan 5.55%
7 Bank of America Merrill Lynch 4.38%
8 Royal Bank of Scotland 3.25%
9 BNP Paribas 3.10%
Foreign exchange
trading increased by
20% between April 2007 and April 2010 and has more than doubled since
2004.
[63]
The increase in turnover is due to a number of factors: the growing
importance of foreign exchange as an asset class, the increased trading activity
of high-frequency traders, and the emergence of retail investors as an important
market segment. The growth of electronic execution and the diverse selection of
execution venues has lowered transaction costs, increased market liquidity, and
attracted greater participation from many customer types. In particular, electronic
trading via online portals has made it easier for retail traders to trade in the
foreign exchange market. By 2010, retail trading is estimated to account for up to
10% of spot turnover, or $150 billion per day (seeretail foreign exchange
platform).
Foreign exchange is an over-the-counter market where brokers/dealers negotiate
directly with one another, so there is no central exchange or clearing house. The
biggest geographic trading center is the United Kingdom, primarily London, which
according to TheCityUK estimates has increased its share of global turnover in
traditional transactions from 34.6% in April 2007 to 36.7% in April 2010. Due to
London's dominance in the market, a particular currency's quoted price is usually
the London market price. For instance, when the International Monetary
Fund calculates the value of its special drawing rights every day, they use the
London market prices at noon that day.
Market participants[edit]
Financial markets

10 Goldman Sachs 2.53%
Public market

Exchange
Securities
Bond market
Bond valuation
Corporate bond
Fixed income
Government bond
High-yield debt
Municipal bond
Securitization
Stock market
Common stock
Preferred stock
Registered share
Stock
Stock certificate
Stock exchange
Voting share
Derivatives market
Credit derivative
Futures exchange
Hybrid security
Over-the-counter
Forwards
Options
Spot market
Swaps
Foreign exchange
Currency
Exchange rate
Other markets
Commodity market
Money market
Reinsurance market
Real estate market
Practical trading
Clearing house
Financial market participants
Financial regulation
Finance series
Banks and banking
Corporate finance
Personal finance
Public finance
V
T
E
Unlike a stock market, the foreign exchange market is divided into levels of
access. At the top is the interbank market, which is made up of the
largest commercial banks and securities dealers. Within the interbank market,
spreads, which are the difference between the bid and ask prices, are razor
sharp and not known to players outside the inner circle. The difference between
the bid and ask prices widens (for example from 0 to 1pip to 12 pips for a
currencies such as the EUR) as you go down the levels of access. This is due to
volume. If a trader can guarantee large numbers of transactions for large
amounts, they can demand a smaller difference between the bid and ask price,
which is referred to as a better spread. The levels of access that make up the
foreign exchange market are determined by the size of the "line" (the amount of
money with which they are trading). The top-tier interbank market accounts for
39% of all transactions.
[59]
From there, smaller banks, followed by large multi-
national corporations (which need to hedge risk and pay employees in different
countries), large hedge funds, and even some of the retail market makers.
According to Galati and Melvin, Pension funds, insurance companies, mutual
funds, and other institutional investors have played an increasingly important role
in financial markets in general, and in FX markets in particular, since the early
2000s. (2004) In addition, he notes, Hedge funds have grown markedly over
the 20012004 period in terms of both number and overall size.
[64]
Central banks
also participate in the foreign exchange market to align currencies to their
economic needs.
Commercial companies[edit]
An important part of the foreign exchange 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[edit]
National central banks play an important role in the foreign exchange markets.
They try to control the money supply, inflation, and/or interest ratesand often
have official or unofficial target rates for their currencies. They can use their often
substantial foreign exchange reserves to stabilize the market. 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.
Foreign exchange fixing[edit]
Foreign exchange fixing is the daily monetary exchange rate fixed by the national
bank of each country. The idea is that central banks use the fixing time and
exchange rate to evaluate behavior of their currency. Fixing exchange rates
reflects the real value of equilibrium in the market. Banks, dealers and traders
use fixing rates as a trend indicator.
The mere expectation or rumor of a central bank foreign exchange 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.
[65]
Several scenarios of this
nature were seen in the 199293 European Exchange Rate Mechanism collapse,
and in more recent times in Asia.
Hedge funds as speculators[edit]
About 70% to 90%
[citation needed]
of the foreign exchange transactions conducted
are speculative. This means 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. Since
1996, Hedge funds have gained a reputation for aggressive currency
speculation. They control billions of dollars ofequity 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.
Investment management firms[edit]
Investment management firms (who typically manage large accounts on behalf of
customers such as pension funds and endowments) use the foreign exchange
market to facilitate transactions in foreign securities. For example, an investment
manager bearing an international equity portfolio needs to purchase and sell
several pairs of foreign currencies to pay for foreign securities purchases.
Some investment management firms also have more speculative
specialist currency overlay operations, which manage clients' currency exposures
with the aim of generating profits as well as limiting risk. While the number of this
type of specialist firms is quite small, many have a large value ofassets under
management and, hence, can generate large trades.
Retail foreign exchange traders[edit]
Individual retail speculative traders constitute a growing segment of this market
with the advent of retail foreign exchange platforms, both in size and importance.
Currently, they participate indirectly through brokers or banks. Retail brokers,
while largely controlled and regulated in the USA by the Commodity Futures
Trading Commission and National Futures Association, have in the past been
subjected to periodic foreign exchange fraud.
[66][67]
To deal with the issue, in 2010
the NFA required its members that deal in the Forex markets to register as such
(I.e., Forex CTA instead of a CTA). Those NFA members that would traditionally
be subject to minimum net capital requirements, FCMs and IBs, are subject to
greater minimum net capital requirements if they deal in Forex. A number of the
foreign exchange brokers operate from the UK under Financial Services
Authorityregulations where foreign exchange trading using margin is part of the
wider over-the-counter derivatives trading industry that includes Contract for
differences and financial spread betting.
There are two main types of retail FX brokers offering the opportunity for
speculative currency trading: brokers and dealers or market
makers. Brokers serve as an agent of the customer in the broader FX market, by
seeking the best price in the market for a retail order and dealing on behalf of the
retail customer. They charge a commission or mark-up in addition to the price
obtained in the market. Dealers or market makers, by contrast, typically act as
principal in the transaction versus the retail customer, and quote a price they are
willing to deal at.
Non-bank foreign exchange companies[edit]
Non-bank foreign exchange companies offer currency exchange and
international payments to private individuals and companies. These are also
known as foreign exchange brokers but are distinct in that they do not offer
speculative trading but rather currency exchange with payments (i.e., there is
usually a physical delivery of currency to a bank account).
It is estimated that in the UK, 14% of currency transfers/payments
[68]
are made
via Foreign Exchange Companies. These companies' selling point is usually that
they will offer better exchange rates or cheaper payments than the customer's
bank.
[69]
These companies differ from Money Transfer/Remittance Companies in
that they generally offer higher-value services.
Money transfer/remittance companies and bureaux de change[edit]
Money transfer companies/remittance companies perform high-volume low-value
transfers generally by economic migrants back to their home country. In 2007,
the Aite Groupestimated that there were $369 billion of remittances (an increase
of 8% on the previous year). The four largest markets (India, China, Mexico and
the Philippines) receive $95 billion. The largest and best known provider
is Western Union with 345,000 agents globally followed by UAE Exchange
[citation
needed]

Bureaux de change or currency transfer companies provide low value foreign
exchange services for travelers. These are typically located at airports and
stations or at tourist locations and allow physical notes to be exchanged from one
currency to another. They access the foreign exchange markets via banks or non
bank foreign exchange companies.
Trading characteristics[edit]
Most traded currencies by value
Currency distribution of global foreign exchange market turnover
[70][4]

Rank Currency
ISO 4217 code
(Symbol)
% daily share
(April 2013)
1 United States dollar USD ($) 87.0%
2 Euro EUR () 33.4%
3 Japanese yen JPY () 23.0%
4 Pound sterling GBP () 11.8%
5 Australian dollar AUD ($) 8.6%
6 Swiss franc CHF (Fr) 5.2%
7 Canadian dollar CAD ($) 4.6%
8 Mexican peso MXN ($) 2.5%
9 Chinese yuan CNY () 2.2%
10 New Zealand dollar NZD ($) 2.0%
11 Swedish krona SEK (kr) 1.8%
12 Russian ruble RUB () 1.6%
13 Hong Kong dollar HKD ($) 1.4%
14 Singapore dollar SGD ($) 1.4%
15 Turkish lira TRY ( ) 1.3%
Other 12.2%
Total
[71]
200%
There is no unified or centrally cleared market for the majority of trades, and
there is very little cross-border regulation. Due to the over-the-counter (OTC)
nature of currency markets, there are rather a number of interconnected
marketplaces, where different currencies instruments are traded. This implies
that there is not asingle exchange rate but rather a number of different rates
(prices), depending on what bank or market maker is trading, and where it is. In
practice the rates are quite close due to arbitrage. Due to London's dominance in
the market, a particular currency's quoted price is usually the London market
price. Major trading exchanges includeElectronic Broking Services (EBS) and
Thomson Reuters Dealing, while major banks also offer trading systems. A joint
venture of the Chicago Mercantile Exchange and Reuters,
called Fxmarketspace opened in 2007 and aspired but failed to the role of a
central market clearing mechanism.
[citation needed]

The main trading centers are New York and London, though Tokyo, Hong
Kong and Singapore are all important centers as well. Banks throughout the
world participate. Currency trading happens continuously throughout the day; as
the Asian trading session ends, the European session begins, followed by the
North American session and then back to the Asian session, excluding
weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as
well as by expectations of changes in monetary flows caused by changes
in gross domestic product (GDP) growth, inflation (purchasing power
parity theory), interest rates (interest rate parity, Domestic Fisher
effect, International Fisher effect), budget and trade deficits or surpluses, large
cross-border M&A deals and other macroeconomic conditions. Major news is
released publicly, often on scheduled dates, so many people have access to the
same news at the same time. However, the large banks have an important
advantage; they can see their customers' order flow.
Currencies are traded against one another in pairs. Each currency pair thus
constitutes an individual trading product and is traditionally noted XXXYYY or
XXX/YYY, where XXX and YYY are the ISO 4217 international three-letter
code of the currencies involved. The first currency (XXX) is the base
currency that is quoted relative to the second currency (YYY), called the counter
currency (or quote currency). For instance, the quotation EURUSD (EUR/USD)
1.5465 is the price of the Euro expressed in US dollars, meaning 1 euro = 1.5465
dollars. The market convention is to quote most exchange rates against the USD
with the US dollar as the base currency (e.g. USDJPY, USDCAD, USDCHF).
The exceptions are the British pound (GBP), Australian dollar (AUD), the New
Zealand dollar (NZD) and the euro (EUR) where the USD is the counter currency
(e.g. GBPUSD, AUDUSD, NZDUSD, EURUSD).
The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes
positive currency correlation between XXXYYY and XXXZZZ.
On the spot market, according to the 2013 Triennial Survey, the most heavily
traded bilateral currency pairs were:
EURUSD: 24.1%
USDJPY: 18.3%
GBPUSD (also called cable): 8.8%
and the US currency was involved in 87.0% of transactions, followed by the euro
(33.4%), the yen (23.0%), and sterling (11.8%) (see table). Volume percentages
for all individual currencies should add up to 200%, as each transaction involves
two currencies.
Trading in the euro has grown considerably since the currency's creation in
January 1999, and how long the foreign exchange market will remain dollar-
centered is open to debate. Until recently, trading the euro versus a non-
European currency ZZZ would have usually involved two trades: EURUSD and
USDZZZ. The exception to this is EURJPY, which is an established traded
currency pair in the interbank spot market. As the dollar's value has eroded
during 2008, interest in using the euro as reference currency for prices in
commodities (such as oil), as well as a larger component of foreign reserves by
banks, has increased dramatically
[citation needed]
. Transactions in the currencies of
commodity-producing countries, such as AUD, NZD, CAD, have also
increased.
[citation needed]

Determinants of exchange rates[edit]
Main article: Exchange rate
The following theories explain the fluctuations in exchange rates in a floating
exchange rate regime (In a fixed exchange rate regime, rates are decided by its
government):
1. International parity conditions: Relative Purchasing Power Parity, interest
rate parity, Domestic Fisher effect, International Fisher effect. Though to
some extent the above theories provide logical explanation for the
fluctuations in exchange rates, yet these theories falter as they are based
on challengeable assumptions [e.g., free flow of goods, services and
capital] which seldom hold true in the real world.
2. Balance of payments model: This model, however, focuses largely on
tradable goods and services, ignoring the increasing role of global capital
flows. It failed to provide any explanation for continuous appreciation of
dollar during the 1980s and most part of the 1990s in face of soaring US
current account deficit.
3. Asset market model: views currencies as an important asset class for
constructing investment portfolios. Assets prices are influenced mostly by
people's willingness to hold the existing quantities of assets, which in turn
depends on their expectations on the future worth of these assets. The
asset market model of exchange rate determination states that the
exchange rate between two currencies represents the price that just
balances the relative supplies of, and demand for, assets denominated in
those currencies.
None of the models developed so far succeed to explain exchange rates and
volatility in the longer time frames. For shorter time frames (less than a few
days) algorithms can be devised to predict prices. It is understood from the
above models that many macroeconomic factors affect the exchange rates and
in the end currency prices are a result of dual forces of demand and supply. The
world's currency markets can be viewed as a huge melting pot: in a large and
ever-changing mix of current events, supply and demand factors are constantly
shifting, and the price of one currency in relation to another shifts accordingly. No
other market encompasses (and distills) as much of what is going on in the world
at any given time as foreign exchange.
[72]

Supply and demand for any given currency, and thus its value, are not influenced
by any single element, but rather by several. These elements generally fall into
three categories: economic factors, political conditions and market psychology.

Types of Foreign Exchange (Currency) Exposure Transaction,
Translation and Economic Exposure


Foreign exchange exposure is classified into three types viz.
Transaction, Translation and Economic Exposure. Transaction
exposure deals with actual foreign currency transaction.
Translation exposure deals with the accounting representation
and economic exposure deals with little macro level exposure
which may be true for the whole industry rather than just the
firm under concern.

Types of Foreign Exchange (Currency) Exposure Transaction,
Translation and Economic Exposure
Types of Foreign Exchange (Currency) Exposure Transaction,
Translation and Economic Exposure

Foreign exchange exposure is said to exist for a business or a
firm when the value of its future cash flows is dependent on the
value of foreign currency / currencies. If a British firm sells
products to a US Firm, cash inflow of British firm is exposed to
foreign exchange and in case of the US based firm cash outflow is
exposed to foreign exchange. Why we are so skeptical about this
exposure? Simple! It is because the exchange rates tend to
change or fluctuate.

In the above situation, we saw how a firm directly involved in the
foreign currency dealing is exposed to the risk of foreign
exchange. It may be surprising to know that a firm with no such
direct connection may also be found exposed to foreign currency
risk.Just to share an example, if a company producing small
electronics products in Sri Lanka is competing against the
products imported from China.



Now if the price of Chinese Yuan per Sri Lankan Rupee is
decreased, there will be a decreased in cost advantage to the
importers over that Sri Lankan company. It is evident from the
example that the firm having no direct access to forex can also be
impacted.

Commonly, the exposure is classified into three types of foreign
currency exposure:

Transaction Exposure: The simplest kind of foreign currency
exposure which anybody can easily think of is the transaction
exposure. As the name itself suggests, this exposure pertains to
the exposure due to an actual transaction taking place in business
involving foreign currency. In a business, all monetary
transactions are meant for profits as its end result. There are all
the chances of that final objective getting hampered if it is a
foreign currency transaction and the currency market moves
towards the unfavorable direction.

If you have bought goods from foreign country and
payables are in foreign currency to be paid after 3 months, you
may end up paying much higher on the due date as currency
value may increase. This will increase your purchase price and
therefore the overall costing of the product compelling the profit
percentage to go down or even convert to loss.

Transaction exposure normally occurs due to foreign currency
debtors of sale, payment for imported goods or services, receipt /
payment of dividend, or payment towards the EMIs of debts etc.

Translation Exposure: This exposure is also well known as
accounting exposure. It is because the exposure is due to
translation of books of accounts into the home currency.
Translation activity is carried out on account of reporting the
books to the shareholders or legal bodies. It makes sense also as
the translated financial statements show the position of the
company as on a date in its home currency.

Gains or losses arising out of translation exposure do not
have more meaning over and above the reporting requirements.



Such exposure can even get reversed in the next year translation
if currency market moves in the favorable direction. This kind of
exposure does not require too much of management attention.

Economic Exposure: The impact and importance of this type of
exposure is much higher compared to the other two. Economic
exposure directly impacts the value of a firm. That means, the
value of the firm is influenced by the foreign exchange.

The value of a firm is the function of operating cash flows
and the assets it possess. The economic exposure can have
bearings on assets as well as operating cash flows. Identification
and measuring of this exposure is a difficult task. Although, the
asset exposure is still measureable and visible in books but the
operating exposure has links to various factors such as
competitiveness, entry barriers, etc which are quite subjective
and interpretation of different experts may be different.

These three types of foreign currency exposures are very
important to understand for an international finance manager.
Analyzing the exposure to foreign exchange helps have the right
view of the firms business and therefore take informed decisions.