Q1.

An efficient market is defined as a market where there are large numbers of rational, profit-
maximisers actively competing, with each trying to predict future market values of individual
securities, and where important current information is almost freely available to all
participants. By extension, in an efficient market at any point in time the actual price of a
security will be a good estimate of its intrinsic value. (Dheeraj Vaidya, CFA, FRM, 2023)

Type of Market efficiency

#1 – Weak-form efficiency

This form reveals all past information about asset or security pricing. Past pricing details
reflected in current prices are insufficient to assist investors in determining correct future
trading prices. As a result, the weak form market efficiency will only result in asset
undervaluation or overvaluation, affecting trade decisions.

For example, Hamid, Suleman, Shah and Shah (2017) conducted and empirical study on
weak-form market efficiency of the stock market returns of India, Sri Lanka, China, Korea,
Malaysia, Hong Kong, Pakistan, Indonesia, Taiwan, Philippine, Singapore, Thailand, Japan
and Australia.

In aggregate they concluded that the monthly prices in these regions including India do not
follow Random Walk Hypothesis and hence investors can make use of arbitrage opportunities
existing in these markets.

#2 – Semi-Strong efficiency

The semi-strong form efficiency theory follows the belief that because all information that is
public is used in the calculation of a stock's current price, investors cannot utilize either
technical or fundamental analysis to gain higher returns in the market. Yet, the investor could
still rely on insider information – existing but not publicly available to the general public – to
make profitable trades with good rate of return out of market.

For example, Ball & Brown (1968) explores the correlation between advertising information
and stock prices to test the existence of a semi-strong form of the America’s stock market.
The results show that accounting information affects stock prices and that the market reflects
this information quickly, indicating semi-effectiveness in how market values reflect public
information. In other words, the market in research achieves semi-strong form of efficiency.

Later, Jegadeesh & Titman (1993) examines the semi-strong market performance of India by
studying successful stock purchases and failed stock sales. The results show that investors
can achieve large profits by buying rich stocks and selling poor stocks.

#3 – Strong efficiency

The strong form version of the efficient market hypothesis states that all information—both
the information available to the public and any information not publicly known—is
completely accounted for in current stock prices, and there is no type of information that can
give an investor an advantage on the market.

Fama (1970) argued that prices reflect the information only to the extent the expenses do not
outweigh the benefits. One of the implications of EMH, as critics argue, is that there will be
equilibrium in capital markets because of the presence of rational and informed agents.
However, in real life, not all traders are perfectly rational. So, in the imperfect world, as
behavioural financial scholars contend, EMH is valid only in theory (in spirit) but not
accurate in practice. Some examples are that the financial crisis around 2008 around the
world was a total failure of EMH, as the stock market largely depends on behavioural needs
rather than financial arithmetic (Malkiel, 2003).

Example: Jensen (1968) evaluated the performance of mutual funds bystudying the
performance of 115 funds during 1945 to 1964. He found that they were on average not able
to beat the market. In addition, he found that no individual fund was able to do significantly
better than what could be expected from random chance.

The Indian study by Rao (2007) considered 181 stocks from BSE 200 for the 3 year period
from 2003-04 to 2005-06. The study concluded that no special expertise is required for
investing in the stock market and showed that mutual funds do not outperform passive
investing methods.

Country: India
Literature Review

In the past there have been many studies related to the efficient market hypothesis, but the
evidence seems to be mixed. A random walk market is consistent with equities being fairly
priced at equilibrium, while the lack of a random walk leads to distortions in the pricing of
capital and risk. This has significant consequences for the distribution of resources within an
economy and, as a result, overall economic growth. If the Indian stock market operates
efficiently, the need for government intervention is minimal. On the other hand, an inefficient
stock market creates prospects for profitable trades. In this context, this study aims to
investigate the type of underperformance in the Indian stock market.

Due to high market capitalization and high market liquidity, capital markets in India have the
potential to contribute to the country's economic growth. Given the growing role of the Indian
capital market in channeling foreign investment and its role as a platform for investors
seeking international diversification, effective analysis of information of Indian Market in
weak form is a must. Furthermore, a review of the existing literature reveals that studies on
weak form efficiency in Indian capital markets are few, outdated and generally inconclusive.

Some studies proved that Indian stock market is not efficient at any forms. Pandey (2003)
concluded that stock price movements in India do not conform to the patterns proposed by
the Random Walk Model and hence Markets in India are inefficient. An efficient market is
defined as a market in which a large number of rational, profit maximizers are actively
competing, each trying to predict the future market value of each security and where
important information is now available almost free of charge to all participants. Broadly
speaking, in an efficient market at any given time, the actual price of a security will be a good
estimate of its intrinsic value. Similarly, Kumar and Kumar (2015) concluded that stock
prices in India do not reflect all information about past stock prices and hence the market is
inefficient. Later, Dash, Nayak, and Das (2019) concluded that the Indian stock market is
inefficient in reflecting all available information. Furthermore, the study revealed that
systematic risk has a significant impact on market efficiency

In other studies, Indian stock market is found efficient in weak form. Diclea, Beyhan, and
Yaoa (2010) evaluated BSE and NSE for their information efficiency and potential benefits
for international diversification. In terms of market efficiency, the Indian market has strong
concurrent and causal dependence on international capital markets and hence the potential for
international diversification is less. Furthermore, Jayanti (2010) analyzed the existence of a
weak form of efficiency in emerging markets. On the basis of stationarity, it is concluded that
the emerging markets in Asia including the Indian market are weak form efficient. Bhunia
(2012) examined the zero profit competitive equilibrium condition in the National Stock
Exchange and concluded that the strong form of efficiency is not found in the Indian market
but the market is still efficient in weaker forms. Myshra, Myshra, and Smith (2015)
concluded that stock indices in the Indian market are mean reversion and that heterogeneity
needs to be corrected before testing the random walk hypothesis using high frequency
financial data.

Market Efficiency studies in India are generally old and inconclusive, thereby reducing their
usefulness in predicting price movements in the market. Furthermore, studies by Fama (1998)
show that anomalies in market efficiency are random results and that with significant
improvements in methodology, these observed anomalies tend to disappear. Based on these
findings, my current research aims to examine Market Efficiency in the Indian Market with
up-to-date database of the market

Empirical Evidence

Emerging stock market:

- Country: India according to MSCI (2022)

- Stock market index: BSE Sensex và NIFTY 50.

- Two specific stock tickers (firms): Infosys Limited (INFY) , State Bank of India (SBI) .

Dataset:

- Data source: investing.com

- Time frame: 12 /07/2023-20/11/2023 (90 Days)

- Data frequency: daily

The analysis will be proceeded with the daily percentage change of the market index and firm
prices, which are generated from raw data with following formula

Formula: ((New price - Old price) / Old price) * 100

In which: - New price is the current stock price. - Old price is the stock price in the past or the
stock price the previous day.

Figure 1. Rate of return of market index: BSE SENSEX

Change %
1.50%

1.00%

0.50%

0.00%
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
-0.50% 2 02 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202
/ / / / / / / / / / / / / / / / / / / / / / / / / / /
1 2 1 7 2 2 2 7 /1 /6 1 1 1 6 2 1 2 6 3 1 /5 1 0 1 5 2 0 2 5 3 0 /5 1 0 1 5 2 0 2 5 3 0 /4 /9 1 4 1 9
7/ 7/ 7/ 7/ 8 8 8/ 8/ 8/ 8/ 8/ 9 9/ 9/ 9/ 9/ 9/ 10 10/ 10/ 10/ 10/ 10/ 11 11 11/ 11/
-1.00%

-1.50%

-2.00%

BSE Sensex

Based on the above chart collected from July 12, 2023 to November 20, 2023, we can see that
the Indian market is a weak form efficient market. Through the above data, it can be seen that
past data does not reflect or predict current and future prices. Conclusions on the same
compared to previous studies of Jayanti (2010) and Bhunia (2012)

To enhance the belief, the author continue with the results of 2 companies index
 INFY Co.
0.015

0.01

0.005

-0.005

-0.01

-0.015

-0.02

-0.025

SBI
0.03

0.02

0.01

-0.01

-0.02

-0.03

-0.04

Look into those results, we can indicate that the EMH of India Market is weak form. The
actual reason may involved with the facts that Most of India largest firms are very incentive
with the securities of internal information so that its rare for investors to catch chance of
holding the powers. Nevertheless, EMH theory may not be always effective as it can be
variable due to specific market situations. Stated by Matteo et al. (2005), asset prices in
markets with high inefficiencies, such as developing economies, may be undervalued and
disconnected from underlying values, raising market volatility and market risk for investors.
One strategy to attain less hazardous markets is to increase market efficiency, which may be
accomplished by improving public disclosure of information from available sources so that
investors can acquire accurate information about their investments. A government policy with
legal power might make an efficient disclosure.

T INFY SBI

T-10

T-9

T-8

T-7

T-6

T-5

T-4

T-3 1.354 24,23

T-2 1,368 24,24

T-1 1.377 24,10

T 1.380 23,26

T+1 1,359 24.79

T+2 1,370 24,19

T+3 1,408 24.17

T+4

T+5

T+6

T+7

T+8

T+9

T+10

The stock price adjustment of large company INFY is completed on the announcement date
(t=0). If we look at the price on t−3, it starts to rise and continues to rise until it stabilizes at
1,380 on the announcement day. After the announcement date, the stock price tends to
decrease. This suggests that the information in the announcement is 'news' and is not included
in the price.

Furthermore, the price continued to increase a bit after the announcement while the news was
fully digested. This shows that the market for small PLC shares is not very efficient. Along
with that, SBI's price fluctuated little until t=0 when it jumped from 23.24 to 23.26, indicating
that the information in the announcement was 'news' and not included in the price.
Furthermore, the price continued to increase a bit after the announcement while the news was
fully digested. This shows that the stock market of INFY and SBI bonds is not very efficient.

Q2.

Capital markets are financial markets where buyers and sellers trade assets. Businesses
typically use capital markets to raise new capital—funds that a business uses to grow or meet
current operating expenses—by issuing assets like stocks or bonds. Investors buy those assets
and, in the case of stocks, gain partial ownership in a company and the opportunity to earn
returns on their investments (Mike, 2022).

The money market is the market for short-term securities. Investors can find a low-risk, low-
return investment in the money market (Joshua, 2022).

* Similarities:

1. Facilitating Efficient Allocation of Resources:

Capital Market: Enables the transfer of long-term funds between savers and users for
investments in capital assets, such as stocks and bonds.

Money Market: Facilitates the short-term borrowing and lending of funds, ensuring liquidity
for financial institutions and corporations.

Both markets can be used by governments to raise funds. Capital Market: Governments issue
long-term bonds to finance infrastructure projects or budget deficits.

Money Market: Governments use short-term debt instruments to meet temporary financing
needs.
Both markets contribute to overall market efficiency by facilitating the quick and effective
allocation of financial resources.

2. Investment and saving opportunities and risk diversitification

Both markets provide platforms for investors to buy and sell financial instruments with
varying risk profiles, allowing for risk diversification and asset accumulation

3. Supporting Economic Growth:

Both money market and capital Market contribute to economic development by channeling
funds into long-term projects and businesses, ensuring smooth financial operations and
fostering innovation and growth.

4. Interest Rate Determination:

Capital Market: Influences long-term interest rates through the pricing of bonds and other
debt instruments.

Money Market: Plays a role in determining short-term interest rates, affecting the overall cost
of borrowing in the financial system.

5. Enhancing customer protection: Both markets are subject to regulatory oversight to ensure
fair and transparent operations, protect investors, and maintain overall financial stability.

* Differences in roles and functions

Capital market Money market

Funding Focus on finance and long-term Focus on finance and Short-term

investments investments

Market Comparatively less liquidity Being short-term, more liquidity

Liquidity

Support the Central banks monitor capital market
implementatio activities closely to assess market
n of Central sentiment, economic indicators, and
bank’s the financing needs of businesses.
monetary This information helps central banks
policy formulate and adjust their monetary
policies accordingly.
central banks can intervene to
influence short-term interest
rates and manage liquidity
conditions. They use tools like
open market operations, discount
rates, and reserve requirements
to regulate money market
 activities and steer economic
conditions.

Ở đây mới chỉ nói đến phần huy động vốn còn bản chất cả 2 thị trường sẽ là luân chuyển vốn
bằng cách phát hành công cụ thì mới có ng mua. Ở đây chưa nói tới ng mua, 2 thị trường rất
quan trọng bởi nó cung cấp môi trường đầu tư nhưng cách đầu tư lại hoàn toàn khác nhau, rủi
ro và return khác nhau sẽ phù hợp vs các nhà đầu tư khác nhau.

* Other differences

Capital Market Money Market

Nature of Deals with long-term securities, such Deals with short-term debt
Instruments as stocks and bonds, which have instruments, such as Treasury
maturities exceeding one year. bills, commercial paper, and
certificates of deposit, with
maturities typically less than one
year.

Investment Primarily focuses on financing for Primarily serves as a source of

Purpose capital projects, business expansion, liquidity for financial institutions,
and long-term investments in allowing them to manage short-
infrastructure or technology term cash flow and liquidity
requirements.

Risk and Involves a higher degree of risk
Return compared to the money market.
Investors may experience higher
returns, but there is also a greater
potential for loss.
Generally considered lower risk
compared to the capital market.
Returns are typically lower,
reflecting the short-term nature of
the investments.

Market individual investors, institutional banks, financial institutions,

Participants investors, corporations, and corporations, and government
governments. entities.

* Money market activities influence asset prices of the capital market

The adjustment of short-term and long-term interest rates by the State Bank and Commercial
Banks has a significant impact on the capital market’s asset prices.
Interest rates are an important factor in forming the value of financial instruments in the
capital market, including stocks, bonds, investment funds, and futures contracts. Adjustments
in interest rates will affect the value of these instruments.

Low interest rates on the short term products in money market often increase attractiveness of
long-term products in capital market to investors, due to the attractiveness of higher rates of
return from those long-term financial instruments. This could lead to an increase in the value
of financial instruments in the capital markets due to higher demand

From firm side, interest rates have a direct impact on businesses' borrowing costs. If interest
rates decrease, businesses' borrowing costs also decrease, helping to increase their ability to
spend capital and invest in production and business activities. This improves the profitability
of the firms and theirs attraction to investors. Eventually, the share price will increase as a
result of higher demand of investors on those promisingly growing firms. On the contrary, if
interest rates increase, businesses' borrowing costs also increase, reducing the attractiveness
of investment and increasing the risk of debt for businesses. This can negatively affect
production and business activities and increase the bankruptcy rate of businesses. This
predictionwill cool down the investors’ interest in these firms’ shares and also bring down the
share price.

VN index

Tìm interest rate, VN index hoặc bond index trong cùng 1 giai đoạn
Sau đó, vẽ 1 đồ thị biểu diễn lãi suất, một đồ thị biểu diễn VN index. Trong đó 1 cột
phần trăm biểu diễn interest rate, 1 cột biểu diễn điểm chỉ số của index, trục ngang thể
hiện thời gian. Sẽ thấy ngay đc ví dụ trong năm 2012, lãi suất tăng và index giảm -> mối
quan hệ ngược chiều, rồi phân tích.

Note:

Candlestick chart: VN-index

Yellow line: VN interest rate

Orange line: VN deposit interest rate

Blue line: VN Bond index (1 year)

Based on the theoretical analysis above on the impact of interest rate adjustments on the
capital market. We can better understand the fluctuations in the Vietnamese market from
2022 until now. It can be seen on the chart that the VN interest rate index increased sharply in
the period 2022-2023, leading to a sharp decrease in the VN-index, along with a relative
decrease in the VN-Bond. Because when interest rates increase, it will be difficult for
businesses and investors to mobilize capital. This reduces the attraction of the stock market,
corporate bonds as well as other financial products. On the contrary, in the period from the
beginning of 2023 until now, interest rates have shown signs of slowing down and decreased
sharply at the end of the year, making it easier for businesses to balance costs to mobilize
capital. This also leads to increased investment demand from people. This is shown by the
sharp increase in VN-index after a long period of sharp decline. Along with that, VN deposit
interest rate also tends to decrease because investors tend to use money to buy stocks and
bonds as well as other financial products.

Q3. Distinguish between a fixed and a floating exchange rate system and critically
discuss why emerging markets/developing countries; tend to favour a fixed exchange
rate system in practice. Give examples to illustrate your answer.

Under simple comprehension, Fixed exchange rates imply that two currencies will always be
exchanged at the same price, but floating exchange rates imply that the prices between each
currency might fluctuate based on market conditions, most notably supply and demand.
A fixed rate, often known as a pegged rate, is one that the government (central bank)
establishes and maintains as the official exchange rate. A fixed price will be decided in
relation to a major international currency (usually the U.S. dollar). According to Klein and
Shambaugh (2006), The idea that pegging to, instance, the US dollar promotes bilateral
commerce with the US and all other nations that have a dollar peg has affected exchange rate
policy. This is especially true for commerce with nations whose currencies cannot be hedged
in forward markets. To keep the local exchange rate stable, the central bank purchases and
sells its own currency on the foreign exchange market in exchange for the currency to which
it is tied.

In contrast to the fixed rate, floating exchange rate is the regime that decided by the private
market through supply and demand. A floating rate is sometimes referred to as "self-
correcting" since any disparities in supply and demand are immediately rectified in the
market. When a currency's demand is low, its value falls, making imported items more
expensive and encouraging demand for domestic goods and services. As a result, additional
employment will be created, causing the market to self-correct. A floating exchange rate
changes all the time. (Hoffmann, 2007) suggested that a basic dynamic micro open market
economy model of traded and nontraded products supports the assumption that nations that
adopt a floating exchange rate regime are better insulated from external shocks in the form of
fluctuations in global real interest rates and production. The floating exchange rate economy
has a less obvious influence on output in the near run, related to the depreciation of the real
exchange rate, which adjusts relative prices and helps to lessen the effect of the shock.
Changes in relative prices impact the trade balance by moving consumption and output away
from traded products and toward nontraded items. Under fixed exchange rate regimes, the
impact on the trade balance is magnified.

It is widely believed that the fixed rate regime is more favored than floating one in the
developing nations. Indeed, The grounds for a currency peg are related to stability. A
government may elect to peg its currency, particularly in today's emerging nations, to
establish a stable environment for international investment. The investor will always know
the value of their investment with a peg and will not have to worry about daily swings. As
well, the monetary policies of developing countries are considered to be unstable, whereas, In
some countries the government is very arbitrary in increasing supply and decreasing demand
leading to inflation. Mà theo đó thì fixed regime. A fixed exchange rate aids in the easy
transfer of funds from one nation to another. It aids smaller and developing countries in
attracting international investment. It also assists smaller countries in avoiding currency
depreciation and maintaining steady inflation.

For example, the State Bank of Vietnam in the period of 2000-2006, was In this period,
applying the fixed anchor exchange rate mechanism, the average interbank exchange rate
announced by the State Bank is kept around from 14,000 VND/USD to 16,000 VND/USD. In
2005, the SBV published the Ordinance on Foreign Exchange and the International Monetary
Fund (IMF) officially recognized Vietnam to fully liberalize current transactions. In 2006,
Vietnam's foreign exchange market began to come under real pressure from the process of
international economic integration. The amount of foreign currency poured into Vietnam
began to increase sharply. The World Bank (WB) and the IMF have warned the SBV to
increase the flexibility of the exchange rate in the context of increasing capital inflows into
Vietnam.

Q4. Explain what you understand by each one of the following markets:

a. Asian-dollar markets.

The Asian Dollar Market serves as an Asia-Pacific regional center for Eurodollars. Since its
inception in 1968, it has mobilized the region's surplus US dollars and met the need for
capital from emerging countries as well as national and multinational enterprises in Asia. The
Singapore office of Bank of America took the effort to develop the Asian dollar market, and
for some time after it was established. According to Pandit (1971), One of the key reasons for
the formation of the Asian dollar market in Singapore is because nonresidents' interest on
deposits in this market is excluded from Singapore's withholding tax (formerly, interest
payments on nonresident dollar accounts in the banks in Singapore were subject to a 40 per
cent withholding tax). However, banks are subject to additional rules. For example, like with
all other deposits, banks must maintain a minimum liquidity ratio of 20% of their Asian
dollar deposits in cash and other permitted assets.

The growth of the Asia dollar market is especially noteworthy given that Singapore was not
the most apparent location for an Asian offshore financial center. The main regional financial
center was Hong Kong, but the Hong Kong authorities made a deliberate decision not to host
an offshore market in Hong Kong, a decision that was initially supported by both the state
and incumbent banks, though the banks later changed their minds as the Singapore market
grew.

Asian money markets joined the Internatonal Money Market (IMM) because Asian
governments, banks, and enterprises sought to speed up commerce and trade rather than
borrowing US dollar deposits from European banks. Asian banks, like European banks, were
burdened with dollar-denominated deposits since all trades were dollar-denominated due to
the supremacy of the US currency, additional transactions were required to support
commerce in other currencies, notably euros. Asia and the EU would go on to share not just a
surge in commerce, but also two of the world's most commonly traded currencies on the
IMM. As a result, the Japanese yen is quoted in US dollars, whereas eurodollar futures are
quoted using the IMM Index, which is a function of the three-month LIBOR. To ensure that
bid prices are lower than ask prices, the IMM Index base of 100 is removed from the three-
month LIBOR. These are standard techniques used to guarantee market stability in other
commonly traded items on the IMM.

b. Euro- dollar markets.

US policy in the late 1960s was heavily concerned with financing military spending,
particularly by printing dollars to finance the Vietnam War . In 1960, official dollar holdings
exceeded US gold stocks by over 300%. So long as there was confidence in the health of the
US economy, this ?dollar overhang? was considered manageable. However, growing US
trade deficits began to reflect a loss of US competitive advantage as other economies had
now fully recovered from the Second World War. The US balance of payments deficit had
grown from $1.9 billion in 1965 to $10.6 billion in 1971. This led to the dilemma whereby
the volume of dollars would have to be stemmed to ensure confidence in the system, but
nevertheless, this could have precipitated a lack of credit in the system. Notably, while this
was termed “the Triffin Dilemma”, announced by the economist Robert Triffin, this essential
problem was always common nature in a growing liberal economy.During the time when the
US balance of payments worsened in the 1960s, it instituted a series of capital controls,
which led to the holding of dollars in banks outside the US. In 1964, the US passed the
Interest Equalisation Tax to discourage foreign borrowers from raising money in the US
market. The Foreign Credit Restraint Program of 1965, limited American bank loans to
foreign borrowers. Finally, the Foreign Investment Program of 1968 restricted US
corporations from using domestic dollars to fund foreign investments. These measures
encouraged the establishment of an off-shore dollar market which became known as the
Euro-market. The name derives from the telex sign-off of a Soviet dollar-denominated bank
account in London, Eurobank. This Soviet Dollar holding was necessary for international
commercial transactions by the USSR, since oil and other commodities are denominated in
US dollars. The fear that the US would seize these funds if they were kept on US soil
prompted the USSR to keep dollars outside the US . The notion that the federal government
sought to regulate the effects of dollars deposited outside the United States upon monetary
policy. As these dollars were outside the domestic banking system, the Federal Reserve had
no jurisdiction (i.e. those deposits were not subject to reserve requirements set by the Fed).
Various legislation, designed to limit the use of Eurodollar deposits by domestic companies
ultimately drove the market overseas - intact and stronger than before.

Another argument was that, the surpluses of oil producing states (such as OPEC) and short-
term deposits of multinational corporations, fuelled the development of the Euro-market
industry. This was confirmed, by Born (1977) , and also Lees (1974) . The American Federal
Reserve Act of 1937 did not permit banks to pay interest on sight-deposits, and interest rates
on time-deposits could not exceed the rate set by the Federal Reserve. It was thus more
profitable to deposit dollars in accounts outside the US. This point was developed by
Windecker (1993) , and Smedresman and Lowenfeld (1989) , by stressing the size of the
Euro-market industry. That the Euro-market grew at over 25% per annum through the 1970s,
and between 1971 and 1984, the Euro-currency market grew from $85 billion to $2,200
billion. In 1988, the Euro-markets comprised of $4 trillion, which exceeded the domestic
deposit market of the United States by $1 trillion.

Today, the vast majority of Eurodollar transactions are conducted in London. The Bank of
England in 1964 stated that: ?Banks in London have been able to attract large sums in dollars
by quoting better rates for deposits, including interest on money at call and short notice ?
categories which earn nothing at all with New York ? and have employed them at less than
the US lending rate and still made a worthwhile turn. They are able to operate on a fairly
small profit margin because the additional overhead expenses of conducting their Eurodollar
activities are minimal.

b. Forward foreign exchange markets.

A forward market is a foreign exchange market that determines the price of a financial
instrument or asset for delivery in the future. Forward markets are widely used to trade a
variety of assets, although the word is most commonly associated with the foreign exchange
market. It may also be utilised markets for securities, interest rates, and commodities.
According to Ngoc (2006), published in his book “Economy Dictionary by Vietnam National
Ecomy University”, A forward exchange market is a market in which currencies are
purchased and sold at a predetermined exchange rate at the time of purchase and sale, but
offered at a later date (called a forward exchange market). is the phrase). Which provided the
forward contract, a kind of future contracts When a person expects to receive or pay a
specific amount in a specific currency in the future, he or she can purchase or sell the
currency in the form of a forward contract. Currency buyer can protect themselves against the
dangers posed by fluctuations in currency rates. Furthermore, speculators participate in this
market since the forward contract does not have to be paid for when it is not due.

Forward exchange market players include huge corporations, banks, speculators, exchange
brokers, and hedgers. Speculators invest in the forward exchange market with the anticipation
of making large returns. Hedgers invest in futures markets to hedge against currency
volatility.

Forwards are traded between banks or between a bank and a consumer, whereas futures are
traded on an exchange that is a party to the transaction. Forwards' flexibility adds to their
desirability in the foreign exchange market. Meanwhile, Forward market prices are
determined by interest rates. The forward price in the foreign exchange market is generated
from the interest rate differential between the two currencies, which is applied throughout the
time from the transaction date to the contract's settlement date. The price of interest rate
futures is determined by the yield curve to maturity.

Typically, the interbank market when not involved in forward my trade for specific dtae such
as a week or a month from the spot date. On the other hands, with the forward market, the
forward rates can be longer than 1-2 years as it maturities beyond 12 months may face low
liquidity. Amounts are often in the millions of dollars, but can reach billions.

The benefits of joining forward market is that buyers can avoid risks in international
payments as Import and export traders and overseas investors are the two components most
susceptible to exchange rate risk in the foreign exchange market. Each adverse exchange rate
movement can cause them significant losses, because usually, the investment amount and the
payment for goods are not small numbers. Moreover, they are often exposed to the exchange
and purchase of foreign currencies, so forward contracts are an effective tool to help them
avoid risks in international payments. Changes in exchange rates effect investors' assets and
capital when they participate in foreign direct investment. The amount of money received by
the host nation will fluctuate based on the movement of the exchange rate. As a result, using
forward contracts will assist investors in avoiding dangers in investing positions.

c. Adverse selection
Adverse selection refers to a situation where one party in a transaction has more information
than the other party, and uses that information to their advantage. For example, if a used car
dealer knows that a car has a serious mechanical problem, but does not disclose that
information to the buyer, the buyer is experiencing adverse selection. The buyer is at a
disadvantage because they do not have the same information as the seller. Another example
of adverse selection is in the insurance market. If an insurance company offers a policy to
someone who they know is high-risk, but charges the same premium as someone who is low-
risk, the low-risk person is experiencing adverse selection. They are paying the same
premium as the high-risk person, even though they are less likely to make a claim.