Foreign Exchange Market

INTRODUCTION
I. INTRODUCTION
A. The Currency Market:
where money denominated in one
currency is bought and sold with
money
denominated in another
currency.

INTRODUCTION
B. International Trade and Capital
Transactions:
facilitated with the ability
to transfer purchasing power
between countries

INTRODUCTION
Location
1.
OTC-type: no specific
location
2.
Most trades by phone,
telex, or SWIFT
SWIFT: Society for Worldwide Interbank
Financial

Telecommunications

FOREIGN EXCHANGE MARKET

I . PARTICIPANTS IN THE FOREIGN
EXCHANGE MARKET
A. Participants at 2 Levels
1. Wholesale Level (95%)
- major banks
2. Retail Level
- business customers

FUNCTIONS OF FOREIGN
EXCHANGE MARKET:
1.Transfer Function:
2.Credit Function:
3.Hedging Function:

KINDS OF FOREIGN
EXCHANGE MARKETS
1.
2.

Spot market
Forward Market

Kinds of Foreign Exchange Markets

1. Spot Market:
- immediate transaction
- recorded by 2nd business
day

Kinds of Foreign Exchange Markets

2.

Forward Market:
- transactions take place at a
specified future date

PARTICIPANTS BY MARKET
1.
Spot Market
a. commercial banks
b. brokers
c. customers of commercial
and central banks
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FOREIGN EXCHANGE MARKET

2. Forward Market
a. Traders
c. Hedgers
d. Speculators

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THE FORWARD MARKET

I. INTRODUCTION
A. Definition of a Forward
Contract
an agreement between a bank and a
customer to deliver a specified
amount
of
currency against
another currency at a specified future
date and at a fixed
exchange rate.
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Forward Contract is made for

two reasons:
1.
2.

Through Hedging
Through Speculation

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THE FORWARD MARKET

1. Purpose of a Forward:
Hedging
the act of reducing
exchange
rate risk.
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THE FORWARD MARKET

2.

THROUGH SPECULATION
TO MAKE PROFIT

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