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.
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.
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Madura, J. (2009). International Financial Management . Mason: South-Western Cengage Learning.
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Wang, P. (2009). The Economics of Foreign Exchange and Global Finance . Heidelberg: Springer-Verlag.
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