FEV UUYS UTE TIM Will be receiving an amount of dollars in 90 days LINE. It Wil WE convert these to Euro to pay its costs and so on. If the exchange rate of the dollar for the Euro falls during the next 90 says this firm will get back less Euros for the dollars than it had hoped for. But if it buys a forward contract today that commits it to sella certain amount of dollars for a set amount of Euro in 90 days time it will avoid that tisk, Trading ‘spot is for immediate delivery and is used either to pay debts in foreign currency or tp make good on a forward contract. 1.3 Motives for foreign exchange dealing The main motives for forex dealing are transactions, to support trade, for overseas investment, to hedge forex risks, and for the purposes of speculation. ‘The foreign exchange markets originated from the needs of trade, But today foreign exchange instruments are speculative assets that are traded in the hope of gain like equities and other financial instruments. The main motives are: (a) _ Transactions needs: a firm, individual or government hold its bank deposits in $ but needs € to pay a supplier in a different country will exchange its balances via its bank or, for large organisations, issue a € denominated instrument to obtain the funds it needs. (b) Finance trade: a firm in Europe importing a cargo from USA will borrow $ for 3 months to pay the suppliers and rely on selling the goods in € to repay the loan. Investment projects: a construction firm from UK building a sports stadium in France using materials and suppliers from Europe and USA will need to borrow € and £ for several years before being paid in € when the stadium is complete, It will issue corporate bonds in € and $. : examples in (b) and (c) show that firms are exposed to risks in trade. For example (c) (9) changes though time. If the $ is expected to 7 exchange their € assets (bank balances, an sell them for € and make a profit on Il in the afternoon to make these (e) Speculation: the va appreciate (that bonds and so on) the transaction. $ profits, relative demand and