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FOREIGN EXCHANGE MARKETTOPIC:

INTERNATIONAL BUSINESS.

FOREIGN EXCHANGE MARKET

•International business may be defined simply as business transactions that take place across national borders

•'Foreign Exchange Market' The market in which participants are able to buy, sell, exchange and speculate on currencies.

•Also called “FOREX” market.•It is place where foreign moneys were bought and sold•It involves buying of one currency and selling of another Currency simultaneously.•Has no geographical boundaries

Participants of Foreign exchange markets are:

•Location: OTC Market – banks and brokers at a financial centre•Wholesale and Retail segments•Size : Daily turnover of over $3.98 trillion• 24 hours market• Efficiency• Currencies traded.

Features of Foreign Exchange Market

When trade takes place….The persons of these countries have to convert their currencies To other countries currencies to make payments.

WHY this Foreign Exchange Market needed ???

Foreign exchange market performs the following three functions:

1. Transfer Function:It transfers purchasing power between the countries involved in the transaction. This function is performed through credit instruments like bills of foreign exchange, bank drafts and telephonic transfers.

2. Credit Function:It provides credit for foreign trade. Bills of exchange, with maturity period of three months, are generally used for international payments. Credit is required for this period in order to enable the importer to take possession of goods, sell them and obtain money to pay off the bill.

3. Hedging Function:When exporters and importers enter into an agreement to sell and buy goods on some future date at the current prices and exchange rate, it is called hedging. The purpose of hedging is to avoid losses that might becaused due to exchange rate variations in the future.

Functions of Foreign Exchange Market

Telephonic Transfer

Methods of Affecting International Payment are:

Cheques and Bank Draft

Foreign Bill of Exchange

Main Types of Foreign Exchange Rates:

1. Fixed Exchange Rate System ( Pegged Exchange Rate System).2. Flexible Exchange Rate System (Floating Exchange Rate System).3. Managed Floating Rate System.

Other types:

1, Spot Exchange Rate System 2. Forward Exchange Rate System

1. Fixed Exchange Rate System: Fixed exchange rate system refers to a system in which exchange rate for a currency is fixed by the government.

2. Flexible Exchange Rate System:In this, the currency is allowed to fluctuate freely according to changes in demand and supply of foreign exchange.

Types of F.E.M

3. Managed Floating Rate System.In this system, central bank interferes in the foreign exchange market to restrict the fluctuations in the exchange rate within certain limits. The aim is to keep exchange rate close to desired target values. :

4.Spot Market:Spot market refers to the market in which the receipts and payments are made immediately.

5.Forward Market: the market in which sale and purchase of foreign currency is settled on a specified future date at a rate agreed upon today.

Participants in forward market

Traders Arbitrageurs Hedgers Speculators Banks governments

As there is no central bank, trading can take place any where in the world and operates on a 24 hour basis apart from weekends.An investor needs only small amounts of capital compared with other investment .forex trading is outstanding in this regard.It is an unregulated market, meaning that there is no trade commission overseeing transactions and there are no restrictions on trade.

Advantages of foreign exchange market

Advantages of foreign exchange market

'PURCHASING POWER PARITY - PPP'

PPP is the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency. It is also called The LAW of ONE price. 

Where: "S" represents exchange rate of currency 1 to currency 2 "P1" represents the cost of good "x" in currency 1"P2" represents the cost of good "x" in currency 2

The relative version of PPP is calculated as:

$1 = RS 50

For Example:

Impact by “PPP” on economy

Nature of foreign exchange market.

Nature of foreign exchange marketThe over-the-counter (OTC) market, where there is no central exchange and clearing house where orders are matched. With different levels of access, currencies are traded in different market makers:The Inter-bank Market - Large commercial banks trade with each other through the Electronic Brokerage System (EBS). Banks will make their quotes available in this market only to those banks with which they trade. This market is not directly accessible to retail traders.The Online Market Maker - Retail traders can access the FX market through online market makers that trade primarily out of the US and the UK. These market makers typically have a relationship with several banks on EBS; the larger the trading volume of the market maker, the more relationships it likely has.•.

•Affected by demand and supply.•Affected by rate of interest.• Affected by inflation rate. •Affected by economic stability of country.•Affected by fiscal policy of the government•Affected by Trade and capital flow

Factors Effecting “The Nature of foreign exchange market”

Currency Appreciation and Depreciation

Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, OR decreasing in the value of a currency, is currency depreciation..

The appreciation of a country's currency refers to an increase in the value of that country's currency. For example:When a country's exports are high, the buyers of these exports need its currency to pay for those exports.

Top Ten Currencies in the World

POSITION 1: U.S. DOLLAR # 2: EURO

# 3: JAPANESE YEN #4: STERLING Pound

Now, I am going to present the top ten currencies in the world , the ranking is based and sorted with respect to their popularity, growth, trade and business usage.

POST # 5: SWISS FRANC POST # 6: Australian doller.

POST # 7: CANADIAN DOLLAR POST # 8: SWEDISH CROWN

# 9: HONGKONG DOLLAR # 10: CORONA NORWAY

► PLAN YOUR TRADE AND TRADE YOUR PLAN.► THE TREND IS YOUR FRIEND.►FOCUS ON CAPITAL PRESERVATION.►KNOW WHEN TO CUT LOSS.►TAKE PROFIT WHEN THE TRADE IS GOOD.►BE EMOTIONLESS.►TRADE is not BASED ON A TIP FROM A FRIEND OR BROKER..

CURRENCY TRADING RULES

•Exposure to exchange rate movement. •Any sale or purchase of foreign currency entails foreign exchange risk. •Foreign exchange transaction affects the net asset or net liability position of the buyer/seller. •Carrying net assets or net liability position in any currency gives rise to exchange risk.

•33.

Foreign Exchange Risk

►Trading Out of Boredom or Anger ►Having Unrealistic Expectations.►Taking Highly Correlated Trades. ►Failing to Use a Stop►Taking Unnecessary Risks.►Being Too Patient With Losers and Not Patient Enough With Winners.

Mistakes by Traders in Forex market.

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