Barson Singh Mithun

111172033 (SL: 26)

Section: A

“Foreign Exchange Market” (04)

1) At this situation, how could he use the money market?
A market where two potential and actual parties gather to buy and sell foreign currency is known
as foreign exchange market. Here Mr. Ahmed can go for short term investment in the money
market. Let’s think Mr. Ahmed have Taka 500. Now he can invest the money either in Bangladesh
where interest rate is 6% or in another country like Germany where interest rate is 8%. So now
obviously Mr. Ahmed will invest his money in Germany as the interest rate is higher but Mr.
Ahmed will also have to consider the currency exchange rate of those two country to ensure profit
from the investment.
As Mr. Ahmed is an experienced broker he can also involve into speculation business. He can
move his fund for short term from one currency to another currency in the hope of profiting from
shifting currency exchange rate.
Suppose today currency exchange rate with Taka and Euro is 1 Euro = 90 Taka. Now if he invests
500 Taka today it will be equivalent to 5.56 Euro.
Now suppose Mr. Ahmed predicted after 3 month the exchange rate will be 1Euro = 96 Taka. If
Mr. Ahmed’s prediction becomes correct then he will get (5.56 * 96) = 533.76 Taka. It’s a very
risky business but experience broker like Mr. Ahmed can adopt this strategy to gain good profit.
Mr. Ahmed can also adopt carry trade. Like he can borrow currency where interest rates are low
and then invest in a country where interest rates are high.
Thus Mr. Ahmed can use the money market.
2) If he wants to deal with foreign buyer, which type of hedging would be more secure way
of exchange for him?
Doing foreign currency exchange is risky due to the dynamic currency rate. Sometimes firms
insure itself against foreign exchange risk which is known as hedging. Hedging can be done in
three ways. Among those I think “Forward Exchange rate” will be more secured for Mr. Ahmed.
Forward exchange occurs when two parties agrees to exchange currency and execute the deal at
some specific point in future. During making the deal both the parties decide a specific exchange
rate and fix it for a certain time period which is known as forward exchange rate. Forward exchange
rate is used for hedging in the forward market. The exchange rate is normally fixed for 30, 90 or
180 days in the future. By fixing the exchange rate for a certain period of time Mr. Ahmed will be
able to avoid the risk associated with exchange rate. As a foreign exchange broker when Mr.
Ahmed will be dealing with foreign buyer, he can fix the exchange rate for some certain time for
a future deal by using Forward exchange rate. Thus he can avoid the risk of currency exchange.