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Market for foreign exchange Essay Example

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Market for foreign exchange

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Market for foreign exchange. By multinationals to payments to labor by the same entities requires well developed foreign exchange markets that cater to their individual needs .As far as the size of the foreign exchange market is concerned, it is no surprise that it encompasses a volume of trading which is 5-10 times the amount of trade in foreign goods and services. There are three major foreign exchange markets across the globe: London, New York and Tokyo. These markets provide several functions; however, the three core functions are those of transmission of purchasing power between the buying and selling party, financing the goods in transit ( credit provision) and hedging of currency risk. As far as the purchasing power function is concerned, goods can be settled for ‘one’ currency which then maybe converted to the local currency.

Financing goods in transit arises due to time consuming process of transfer of goods between countries. Finally, hedging function is associated with the transfer of currency risk from the seller of that risk to the buyer.The foreign exchange market operates in a complex environment that consists of two levels: the interbank and the retail markets (Bollerslev & Domowitz, 1993). In general, these encompass a wide range of market participants including the dealers, brokers, users (MNCs, importers, exporters), speculators, arbitrageurs and treasury funds institutions (Coyle, 2001).Transactions in the foreign exchange market take different forms. They may take the form of spot transactions, forward transactions or Swaps (Coyle, 2001). In a Spot transaction the delivery of currency must be made immediately with a specified settlement date (Coyle, 2001). The forward market is characterized by future delivery of the currency at a specified time and amount (Coyle, 2001). The value is determined at the time of initiation of the contract, whereas the delivery and payment are deferred till expiration or maturity of the contract. Finally, under the Swaps transaction, the delivery and sale of the currency is done at the same time for a particular amount of currency with particular value dates (Coyle, 2001). Risk for the dealer is sufficiently reduced under this type of transaction owing to the simultaneous purchase and sale of currency. Swaps are the most common type of foreign exchange transactions, followed by Spot and Forwards (Madura, 2009).Furthermore, the foreign exchange markets consist of quotations that are characterized as either. Market for foreign exchange.

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Bollerslev, T., & Domowitz, I. (1993). Trading patterns and prices in the interbank foreign exchange market. Journal of Finance , 1421–1443.

Coyle, B. (2001). Foreign Exchange Markets. Chicago: Fitzroy Dearborn Publishers.

Levi, M. D. (2009). International finance . Oxon: Routledge.

Madura, J. (2009). International Financial Management . Mason: South-Western Cengage Learning.

Riehl, H., & Rodríguez, R. M. (1983). Foreign exchange and money markets: managing foreign and domestic currency operations. New York: Kingsport Press.

Wang, P. (2009). The Economics of Foreign Exchange and Global Finance . Heidelberg: Springer-Verlag.

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