You can keep your great finds in clipboards organized around topics. SlideShare Explore Search You. Show related SlideShares at end. Full Name Comment goes here. Are you sure you want to Yes No. Vaibhav Gaware , Attended D. Embeds 0 No embeds. No notes for slide. However, in order for all the countries with different currencies to trade with one another, a system of exchange rate between their currencies is needed; this system, is formallyknownasforeignexchangeorcurrencyexchange.
In the early days, the system of currency exchange is supported solely by the gold amount held in the vault of a country. For floating exchange rate, its value is determined by the supply and demand of the global market where the supply and demand is bound by all these factors such as foreign investment, inflation and ratios of import and export.
Normally, this system is adopted by most of the advance countries like for example UK, US and Canada. All of these countries have a similarity where their market is well developed and stable in economic terms.
These countries choose to practice this system due to the reason where floating exchange rate is proven to be much more efficient compared to the pegged exchange rate. The reason behind this is because for floating exchange rate, the market itself will re-adjust the exchange rate real-time in order to portray the actual inflation and other economic forces. However, every system has its own flaw and so does the floating exchange rate system. For instance, if a country suffers from economic instability due to various reasons such as political issues, a floating exchange rate system will certainly discourage investment due to the high risk of suffering from inflationary disaster or sudden slum in exchangerate.
Another form of exchange rate is known as pegged exchange rate. This is a system where the value of the exchange rate is fixed by the government of a country and not the supply and demand of the market. This system is called pegged exchange rate because the value 3. As a result, the value of the pegged currency will not fluctuate unlike the floating currency. The working principle behind this system is slightly complicated where the government of a country will fixed the exchange rate of their currency and when there is a demand for a certain currency resulting a rise in the exchange rate, the government will have to release enough of that currency into the market in order to meet that demand.
However, there is a fatal flaw in this system where if the pegged exchange rate is not controlled properly, panics may arise within the country and as a result of that, people will be rushing to exchange their money into a more stable currency. Due to this reason, only those under-developed or developing countries will practice this method as a form to control the inflationrate.
However, the truth is, most of the countries do not fully practice the floating exchange rate or the pegged exchange rate method in reality. Instead, they use a hybrid system known as floating peg. Floating peg is the combination of the two main systems where one country will normally fixed their exchange rate to the US Dollars and after that, they will constantly review their peg rate in order to stay in line with the actual market value.
The Foreign exchange market, or commonly known as FOREX, is the largest and most prolific financial market because each day, more than 1 trillion worth of currency exchange takes place between investors, speculators and countries.
From this, we can deduce that the actual mechanism behind the world of foreign exchange is far more complicated than what we may already know, and that, the information mentioned earlier is just the tip of an iceberg.
However, money has been around in one form or another since the time of Pharaohs. The Babylonians are credited with the first use of paper bills and receipts, but Middle Eastern moneychangers were the first currency traders who exchanged coins from one culture to another. During the middle ages, the need for another form of currency besides coins emerged as the method of choice.
These paper bills represented transferable third-party payments of funds, making foreign currency exchange trading much easier for merchants and traders and causing these regional economies to flourish. From the infantile stages of forex during the Middle Ages to WWI, the forex markets were relatively stable and without much speculative activity.
After WWI, the forex markets became very volatile and speculative activity increased tenfold. Speculation in the forex market was not looked on as favorable by most institutions and the public in general. The Great Depression and the removal of the gold standard in created a serious lull in forex market activity.
From until , the forex market went through a series of changes. These changes greatly affected the global economies at the time and speculation in the forex markets during these times was little, if any. A foreign exchange quotation or quote is a statement of willingness to buy or sell at an announced rate.
Participants include banks and nonbank foreign exchange dealers, individuals and firms conducting commercial and investment transactions, speculators and arbitragers, central banks and treasuries, and foreign exchange brokers. A spot transaction is for an almost immediate value date while a forward transaction is for a value date somewhere in the future.
A bid is the exchange rate in one currency at which a dealer will buy another currency. An ask is the exchange rate at which a dealer will sell the other currency. The spread is the difference between the bid price and the ask price. This spread reflects the existence of commissions and transaction costs. Why the foreign Exchange Market is Unique? Currencies may be converted when bought or sold without causing too much movement in the price and keeping losses to a minimum.
Forex trading is outstanding in this regard. The interest rate spread is an attractive advantage. In theory at least, such a failure could bring ruin to the forex market asa whole. Various participants Of foreign Exchange Market: Governments have requirements for foreign currency, such as paying staff salaries and local bills for embassies abroad, or for arraigning a foreign currency credit line, most often in dollars, for industrial or agricultural development in the third world, interest on which ,as well as the capital sum, must periodically be paid.
There are different types of banks, all of which engage in the foreign exchange market to greater or lesser extent. Some work to signal desired movement in the market without causing overt change, while some aggressively manage their reserves by making speculative risks. The vast majority, however, use their knowledge and expertise is assessing market trends for speculative gain for their clients Brokering Houses: These exist primarily to bring buyer and seller together at a mutually agreed price.
The broker is not allowed to take a position and must act purely as a liaison. Brokers receive a commission from both sides of the transaction, which varies according to currency handled. The use of human brokers has decreased due mostly to the rise of the interbank electronic brokerage systems International Monetary Market: The International Monetary Market IMM in Chicago trades currencies for relatively small contract amounts for only four specific maturities a year. Originally designed for the small investor, the IMM has grown since the early s, and the 9.
These tend to be large New York commission houses that are often very aggressive players in the foreign exchange market. While they act on behalf of their clients, they also deal on their own account and are not limited to one time zone, but deal around the world through their agents.
Corporations are the actual end-users of the foreign exchange market. With the exception only of the central banks, corporate players are the ones who affect supply and demand. Since the corporations come to the market to offset currency exposure they permanently change the liquidity of the currencies being dealt with. This includes smaller companies, hedge funds, companies specializing in investment services linked by foreign currency funds or equities, fixed income brokers, the financing of aid programs by registered worldwide charities and private individuals.
Retail investors trade foreign exchange using highly leveraged margin accounts. The amount of their trading in total volume and in individual trade amounts is dwarfed by the corporations andinter bank markets.
Central Bank External value of the domestic currency is controlled and assigned by central bank of everycounty. Each country has a central or apex bank. With its wide branchnetwork the Commercial banks buy the foreign exchange and sell it to the importers.
These banks are the most active among the market players and also provide services like convertingcurrency from one to another. Local brokers canconduct Forex transactions as per the rules and regulations of the Forex governing body of their respective country.
The Forexmarket operates all around the clock and the market day initiates with Tokyo andfollowed by Bahrain Singapore, India, Frankfurt, Paris, London, New York, and Sydney before things are back with Tokyo the next day Speculators In order to make profit on the account of favourable exchange rate, speculators buy foreign currency if it is expected to appreciate and sell foreign currency if it is expected to depreciate.
They follow the practice of delaying covering exposures and not offering a cover till the time cash flow is materialized. Other financial institutions involved in the foreign exchange market include: The ratios between the currencies of two countries are exchange rates in forex. If one currency loss its value in the market and at the same time the value of the another currency increases this causes the fluctuations in the exchange rate in foreign exchange market.
This is said to be a shift in wealth, as a fixed amount of Japanese Yen can now purchase many more goods than two decades ago. No Centralized Market The foreign exchange market does not have a centralized market like a stock exchange. Brokers in the foreign exchange market are not approved by a governing agency.
Business network and operation market of foreign exchange takes place without any unification in transaction. Foreign exchange currency trading has been reformed into a non-formal and global network organization it consists of advanced information system. Trader of forex should not be a member of any organisation. Circulation work Foreign exchange market has member from all the countries, each country has differentgeo graphical positions so forex operates all around the clock on working days i.
Mondayto Friday every week. Because the time in Australia is different than in European countries, this kind of 24 hours operation, free from any time is an ideal environment for investors. For instance, a trader may buy the Japanese Yen in the morning at the New York market, and in This involves immediate payment at the current exchange rate is called as spot rate.
The traders open to the volatility of the currency market, which can raise or lower the price between the agreement and the trade. Futures Market These kind transactions involve future payment and future delivery at an agreed exchange rate.More...