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Foreign Exchange Market

The document discusses the foreign exchange market, including what it is, how exchange rates work, and the importance of the market for international businesses. It covers topics like spot rates, forward rates, and managing foreign exchange risk.

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aqhammam
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68 views20 pages

Foreign Exchange Market

The document discusses the foreign exchange market, including what it is, how exchange rates work, and the importance of the market for international businesses. It covers topics like spot rates, forward rates, and managing foreign exchange risk.

Uploaded by

aqhammam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 20

International Business 1

Foreign Exchange Market

International Business 2
Foreign Exchange Market
CONTENTS
o Foreign Exchange Market (FEM)?
o Foreign Exchange Risk
o Exchange Rate
o Importance of FEM?
o Nature of FOREX
o Spot Rates VS Forward Rates
o Exchange Rates Prediction

International Business 3
Foreign Exchange Market

International Business 4
Foreign Exchange Market
• Foreign Exchange Market
o Used to convert the currency of one currency into another
country.
o Provides some insurance against Foreign Exchange Risk.
• Foreign Exchange Risk
o Adverse consequences of unpredictable changes in
exchange rates
• Exchange Rate
o Rate at which one currency is converted to the other

International Business 5
Foreign Exchange Market

International Business 6
Foreign Exchange Market
Importance of FEM
• International Companies use this Market for:
o Payments they receive for exports
o Income they receive from foreign investments
o Pay a foreign company for its products or services in its
country’s currency
o Spare cash investment for short terms in money markets
o Involve in currency speculation i.e. short-term movement
of funds from one currency to another in the hopes of
profiting from shifts in exchange rates
International Business 7
Foreign Exchange Market
Nature of FEM
• Foreign exchange market is a global network of:
o Bank
o Brokers
o Foreign exchange dealers
• They are connected by electronic communications systems.

• Arbitrage
When exchange rates in different markets are not same, the
arbitrageur simultaneously buys at the lower price and sells at
the higher price.
International Business 8
Foreign Exchange Market

International Business 9
Foreign Exchange Market
How Exchange Rates Are Affected?

o Country’s price inflation

o Country’s interest rate

o Market psychology

International Business 10
Foreign Exchange Market
Spot Rate Vs Forward Rates
• Spot Rate
o The spot rate is the price quoted for immediate settlement
on a commodity, a security or a currency.
o The spot exchange rate is the rate at which a foreign
exchange dealer converts one currency into another
currency on a particular day.
o spot rates change continually depending on the supply and
demand for that currency and other currencies
o Spot exchange rates can be quoted as the amount of
foreign currency one U.S. dollar can buy.
International Business 11
Foreign Exchange Market

International Business 12
Foreign Exchange Market
Spot Rate Vs Forward Rates
• Forward Rate
o A forward rate is an interest rate applicable to a financial
transaction that will take place in the future.
o To insure against a possible adverse foreign exchange rate
movement, firms engage in forward exchanges
o The parties agree to exchange currency and execute
the deal at some specific date in the future
o Rates for currency exchange are typically quoted for 30,
90, or 180 days into the future

International Business 13
Foreign Exchange Market

International Business 14
Foreign Exchange Market
Exchange Rates Prediction
• Fundamental Analysis
• Drawn on Economic Factors
o Interest Rate
o Monetary Policy
o Inflation Rates
o Balance of Payment
• Technical analysis
o Past trends and waves used for prediction of future
trends
International Business 15
Foreign Exchange Market
Exchange Rate Forecasting Services
• Efficient Market School
o forward exchange rates do the best possible job of
forecasting future spot exchange rates, and, therefore,
investing in forecasting services would be a waste of
money

• Inefficient Market School


o Companies can improve the foreign exchange market’s
estimate of future exchange rates by investing in
forecasting services
International Business 16
Foreign Exchange Market
Exchange Rate Importance for Managers
• Foreign Exchange Risk
o Transaction Exposure: Impact of fluctuations in foreign
exchange values on income from individual transactions

o Translation Exposure: Impact of fluctuations in currency


exchange rate on financial statements of a company

o Economic Exposure: Impact of fluctuations in currency


exchange rate on a firm’s future international earning
power
International Business 17
Foreign Exchange Market
Exchange Rate Risk Control
o For Transaction Exposure and Translation Exposure Risks
• Buy forward
• Use swaps
• Lead and lag payables and receivables
o For Economic Exposure Risk:
• Distribute productive assets to various locations
• Do not concentrate assets where rises in currency
values lead to increases in the foreign prices of the
goods and services the firm produces
International Business 18
Foreign Exchange Market
Exchange Rate Risk Control
o Central control of exposure to protect resources efficiently
o ensure that each subunit adopts the correct mix of tactics
and strategies
o Attempt to forecast future exchange rates
o Establish good reporting systems
o Produce monthly foreign exchange exposure reports

International Business 19
Foreign Exchange Market
Currency Convertibility
o Freely convertible: Both residents and non-residents are
allowed to purchase unlimited amounts of foreign currency
with the domestic currency
o Externally convertible: Non-residents can convert their
domestic currency into a foreign currency but the ability of
residents is limited
o Nonconvertible: Both residents and non-residents are
prohibited from converting their domestic currency into a
foreign currency.

International Business 20

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