The Foreign Exchange Trading Process

 How does it work?

- Foreign Exchange trading process happens when there is a monetary transaction between a
local entity and a foreign entity who sells goods and services.
- It is usually done through exchanging or converting domestic currency to foreign currency.
-This conversion usually takes place between the company and its bank.

Explanation:
For example, an international business entity who sells goods and services cannot transact to
other foreign companies, customers and suppliers if the currency that they are using is not
acceptable or cannot be used by those people who are involved in the business. So what they
need to do is to first have their domestic currency converted into the foreign currency for them
to be able to use the money to continue the business transactions inside their own respective
countries.

Another example of foreign exchange trading process is through the remittance of our OFWs.
Since OFWs work abroad, ang pera o ang kita na natatanggap nila ay for example US Dollars,
kapag nagreremit sila ng pera sa mga remittance center or banks dito sa Pilipinas nangyayari na
yung foreign exchange trading process kung saan yung pera nila in dollars will be converted into
Philippine Peso, which is the legal tender that we use here in the Philippines.

Banks and Exchanges

 At one time, only the big money center banks could deal directly in foreign exchange. But now,
the emergence of electronic trading has changed that by enabling the different types of banks to
directly transact to other foreign businesses, banks and even investors.

Explanation:
Before a regional bank doesn’t have the power to be involved in the foreign processes, they
depend or rely on the big money center banks before dealing with trades. But now, like what I
have mentioned a while ago the emergence of electronic trading has been the key for them para
magkameron na din sila ng access and directly makapag-transact sa kanilang foreign clients and
sa mga international markets and entities like Bloomberg, Thomas Reuters, or EBS.

 Despite this, the greatest volume of foreign-exchange activity takes place with the big money
center banks. Because of their reach and volume, they are the ones that set the prices in global
trading of foreign exchange.

Top Exchanges for Trading Foreign Exchange

The following are the three (3) of the best known exchanges:
 1. CME Group- CME Group Inc. is an American global markets company. It is the world's
largest financial derivatives exchange, and trades in asset classes that include
agricultural products, currencies, energy, interest rates, metals, stock indexes and
crypto currencies futures.
2. NASDAQ OMX- is an American multinational financial services corporation that owns
and operates three stock exchanges in the United States: Nasdaq stock exchange, the
Philadelphia Stock Exchange, and the Boston Stock Exchange, and seven European stock
exchanges. It is headquartered in New York City.
3. ICE (International Exchange) - operates global exchanges, clearing houses and provides
mortgage technology, data and listing services. The company owns exchanges for
financial and commodity markets, and operates regulated exchanges and marketplaces.

Explanation:
Those are the global companies that are known for exchanging stocks, products and other things
in the global market which is most likely the reason why they have been entitled as the best-
known exchanges.

HOW COMPANIES USE FOREIGN EXCHANGE

1. Cash Flow Aspects of Imports and Exports
 Commercial Bills of Exchange
- With a draft or commercial bill of exchange, one party directs another party to make payment.
-An individual or a company that pays a bill in a domestic setting can pay cash, but checks are
typically used—often electronically transmitted.
-A draft is an instrument in which one party (the drawer) directs another party (the drawee) to
make a payment. The drawee can be either a company, like the importer, or a bank.

Explanation:
This usually happens in every company or businesses na merong connection towards other
foreign companies. For example, Company A which is a local company buys some of its supplies
to Company B which is a Foreign Company Supplier. Dahil magkaiba sila ng locations ng
company, they need to make adjustments when it comes to the payment process. They usually
use cheques like drafts or bill of exchange para mas mabilis na transactions despite the
differences of the locations. It can either be done in a bank na ginagamit nila sa kanilang
businesses or via electronic means.

 Documentary drafts and documentary letters of credit are often used to protect both the buyer
and the seller. They require that payment be made based on the presentation of documents
conveying the title, and they leave an audit trail identifying the parties to the transactions.

Explanation:
 These documentary drafts and documentary letters of credit daw po ay yung parang
international payment instrument na ang purpose ay to make sure na ang buyer ay magbabayad
tas si seller ay matatanggap ang bayad through the use of those instruments.

 Sight Draft- it is type of bill of exchange or draft made if the exporter requests payment to be
made immediately. A sight draft requires payment to be made when it is presented.
Explanation:
Kapag sight draft daw po ang binigay ay nasa exporter pa din yung title ng goods tsaka lang
mapupunta ang title ng goods sa importer kapag na-receive at nabayadan na.

 Time Draft- a financial instrument use if the payment is to be made later. (say, 30 days after
delivery).
- A type of payment document whereby a buyer accepts shipped goods and agrees to pay the
seller at a specified future date.
Explanation:
Unlike sight draft na payable immediately ang time draft naman ay pedeng madelay or pedeng
hindi muna agad bayadan kase may specified na date kung kelan pede bayadan.

 Letter of Credits- obligates the buyer’s bank in the importing country to honor a draft presented
to it, provided that the draft is accompanied by the prescribed documents. For the L/C to be
valid, all of the conditions described in the documents must be adhered to.
-obligates the buyer’s bank to honor a draft presented to it and assume payment; a credit
relationship exists between the importer and the importer’s bank
Explanation:
Before daw po mahonor ang letter of credits, kailangan muna na mameet yung requirements
and documents needed ng party na involved para ma-make sure na kaya nilang bayadan yung
kanilang na-acquire at para maiwasan ang mga frauds ganern.

-In addition, letters of credit are irrevocable, which means they cannot be cancelled or changed
in any way without the consent of all parties to the transaction.
-A letter of credit must specify or state the currency of the contract. If the L/C is not in the
exporter’s currency, the exporter will have to convert the foreign exchange into that currency as
soon as it is received. (Since magkaiba ng currency , kailangan muna nila malaman kung
macoconvert ba yung pera na binayad sa kanila para magamit nila in their business operations)

 Confirmed Letter of Credit

- a guarantee that a borrower/exporter gets from a second bank in addition to the first letter of
credit.
- A letter of credit transaction may include a confirming bank in addition to the parties
mentioned previously. With a confirmed letter of credit, the exporter has the guarantee of an
additional bank—sometimes in the exporter’s home country, some times in a third country.
 Explanation:
The confirmed letter decreases the risk of default for the seller. By issuing the confirmed letter,
the second bank promises to pay the seller if the first bank fails to do so.

2. Other Financial Flows

 Speculation
-it is the buying or selling of a commodity—in this case, foreign currency—that has both an
element of risk and a chance of great profit.
-In the world of finance, speculation, or speculative trading, refers to the act of conducting a
financial transaction that has substantial risk of losing value but also holds the expectation of a
significant gain or other major value.
-Investors can use foreign-exchange transactions to speculate for profit or to protect against
risk.
Explanation:
Speculation is used by entities or individuals to earn more profit pero at the same time pedeng
maging successful or mag-fail o magkameron ng loss sayong part depende sa circumstances
inside the market. For example, a hedge fund buys euros in anticipation that the euro will
strengthen against other currencies. If it does, the investor earns a profit; if it weakens, the
investor incurs a loss.
 Speculators are important in the foreign-exchange market because they spot trends and try to
take advantage of them. They can create demand for a currency by purchasing it in the market,
or they can create a supply by selling.
-they take positions in foreign exchange markets and other capital markets to earn a profit.
Explanation:
Speculators sila yung parang investors na ang purpose is to earn profit once na makahanap sila
ng opportunity to invest or buy an asset na sa tingin nila ay makakapag-produce ng more profits.
And at the same time malaki ang natutulong nila sa market kase parang sila yung nagiincrease
ng demand sa mga tao na magtake din ng chance kahit may possibility na makaranas sila ng risk.
 Arbitrage- the buying and selling of foreign currencies at a profit due to price discrepancies.
-it is the strategy of taking advantage of price differences in different markets for the same
asset.
Explanation:
A situation where arbitrage is present, kapag bumili ka ng isang asset like an equipment sa
market in a low price tapos ibebenta mo sa iba in a different and higher price. In this case,
makakapag-release ka ng profit.
Kapag naman sa foreign-exchange, bumubili ka nang foreign currencies tas ang objective mo ay
mapapaltan yung binili mo sa ibang currency na alam mong mas lalaki ang value. Kunware ay US
Dollars to Euros.
 Interest arbitrage- it involves investing in interest-bearing instruments in foreign exchange in an
effort to earn a profit due to interest rate differentials.
 LESSON 4.2- FACTORS THAT INFLUENCE EXCHANGE RATES

Managers must understand how governments set an exchange rate and what causes it to change.
Such understanding can help them anticipate exchange rate changes and make decisions about
business factors that are sensitive to those changes, such as the sourcing of raw materials and
components, the placement of manufacturing and assembly, and the choice of final markets.

 The International Monetary Fund

Origin and Objectives
The fundamental mission of the IMF is to:
- promote international monetary cooperation and exchange-rate stability, facilitate the
balanced growth of international trade, and provide resources to help members in balance-of-
payments difficulties or to assist with poverty reduction.
-Through a process of surveillance, the IMF monitors the global economy as well as the
economies of individual countries and advises on needed policy adjustments.
-Through a process of surveillance, the IMF monitors the global economy as well as the
economies of individual countries and advises on needed policy adjustments.
-The IMF has three main functions: overseeing economic development, lending, and capacity
development.

Explanation:
Ang International Monetary Fund daw ay isang organization na nakakatulong na magpromote o
mag-encourage ng international trade, which is a good advantage pag dating sa foreign
exchange kase mas lumalawak yung scope ng mga bansa na naiinvolve sa iba’t-ibang global
businesses. Tapos, nakakatulong din sila sa economic growth ng isang bansa.

 Bretton Woods and the Principle of Par Value

-The Bretton Woods Agreement established a system of fixed exchange rates under which each
IMF member country set a par value for its currency based on gold and the U.S. dollar.
Explanation:
Based on my research ang Bretton Woods Conference daw po ang nag-establish ng organization
na International Monetary Fund and World Bank. And through this, nakagawa sila ng efficient na
foreign exchange system na up until now ay ina-apply pa din ng IMF at ng World Bank.

The IMF Today

 The Quota System
The IMF Quota- the sum of the total assessment to each country becomes a pool of money that
the IMF can draw on to lend to other countries. It forms the basis for the voting power of each
country, the higher its individual quota, the more votes a country has.
-Quotas determine the maximum amount of financial resources a member is obliged to provide
to the IMF.
-it is the key determinant of the voting power in IMF decisions.
Special Drawing Rights (SDRs) – it is an international reserve asset given to each country to help
increase its reserve, the unit of account in which the IMF keeps its financial records. The
currencies making up the SDR basket are the U.S. dollar, the euro, the Chinese renminbi, the
Japanese yen, and the British pound. The Chinese renminbi (yuan) was added in 2016.

Explanation:
Ang example po ng Special Drawing Rights ngayon ay nong nakatanggap ang Philippines from
International Monetary Fund worth of 2.6 Billion Dollars para makatulong sa Philippines na
makarecover sa Corona Virus.
In short, ang Special Drawing Rights ay yung asset na binibigay ng IMF sa kanilang members na
country para makatulong sa global economic system at para maiwasan ang external debt.