Hollywood often portrays the world of finance as glamorous, fast-paced, and high-risk. In reality, it is often just that. Few financial markets are riskier than the foreign exchange, where a split-second decision can make or break a career and more traders fail than not. This introduction will give an overview of the market, its participants, size and liquidity, structure, common instruments used, major events, and relevance to the public. OVERVIEW The foreign exchange market, known as forex, FX, or the currency market, is a global decentralized market for the trading of currencies. Its function is to determine the relative values of different currencies. Forex enables currency conversion. An example is a U.S. business importing goods from China, where the importer’s income is in U.S. dollars and the exporter charges in yuan. It also supports direct speculation and evaluation relative to the value of currencies and the carry trade, which is speculation on interest rate differentials between currencies. Within the general forex are three markets: the spot market, the forwards market, and the futures market. Spots, forwards, and futures will be defined later. Trading in the spot market has always been the largest market because it is the underlying real asset that the forwards and futures markets are based on. Forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future. Forex is considered unique, and the closest to the ideal of perfect competition wherein no single participant is large enough to have the power to set prices for a homogenous product, due to its huge trading volume representing the largest asset class in the world leading... ... middle of paper ... ...ed currency can result in imported inflation for countries like the US that are substantial importers. A sudden decline of 20% in the dollar, for example, may result in imported products costing 25% more since a 20% decline means a 25% increase to get back to the original starting point. CONCLUSION Forex is a very complicated system with many moving parts that fit together delicately. It plays a stronger role in our lives than most of us give credit for, and it has had its share of issues. Under the veneer, it is not nearly as glamorous as Hollywood might make it out to be. For risk-lovers, the potential for great profit is there. It doesn’t get much more risky or fast-paced than currency. Given the impact of the currency market on our lives, forex seems a dangerous force to be left unsupervised as it is. Sometimes it’s even described as the wild west of finance.
The law of one price is ease to test in the same country, this is done through comparing the prices of goods; example, is the price of a meal the same in different cities within the same country (Port of Spain, Chaguanas, San Fernando) or within Trinidad’s sister island Tobago? The theory indicates that prices ought to be homogenous throughout. Conversely, the comparison of prices between different countries where different currencies are used tends to be a lot more difficult; however, this can still be done by looking at international currency markets where traders exchange currencies at some rate of exchange depending on the demand and supply of each c...
Sukirno (2004) states that foreign exchange rates or foreign exchange rate is the price or value of a country's currency is expressed in another country's currency, or it can also be interpreted as the amount of domestic currency needed to get one unit of foreign currency. Meanwhile, according to Mankiw (2013) the exchange rate between two countries is a rate agreed resident of both countries for mutual trade with one another. Economists distinguish between the exchange rate being two (Mankiw, 2013), namely:
On the other hand, there are disadvantages to weakening dollar. The weak dollar is bad for American citizens. Weaken dollar lifted import price. Consumers face higher prices on foreign products or services.
The coins made in gold, silver and bronze were traded during Roman Empire and the shortage of coins created a barrier for money circulation. However with the establishment of paper money, a sophisticated banking, global clearing system and electronic money, the global financial system evolved with a worldwide framework of legal agreements. In the Global Financial market, foreign currencies issued by the world, countries are traded by the buyers and sellers using currency exchange rates. Now a day, it is very common practices of companies in one country to raise capital in a foreign country by listing their stocks on major foreign exchanges given the growth of equity markets are becoming more globalized (SNHU, 2015).
International investing is something that many investors find that they can benefit from for many reasons. Two of the main reasons why investors choose to invest in foreign markets are growth and diversification. Growth allows investors the potential to take advantage of new opportunities in foreign emerging markets. International markets can potentially offer opportunities that might not be available in the United States. Diversification allows investors to spread out their risk to different markets and foreign companies other than those just in the United States allowing them to potentially create larger returns on their investment as well as reducing risks. (U.S. Securities and Exchange Commission, 2012) While investing internationally can be a very lucrative and rewarding decision, there are also extra risks involved with investing internationally. One of the main risks that international investors encounter is foreign exchange risk also known as currency risk. Currency risk is a financial risk that is created by contact with unforeseen changes in the exchange rate between two currencies. These changes can cause unpredictable gains or losses when profits from investments are converted from a foreign currency to the United Stated dollar. There are precautions that can be taken by investors to potentially lower their risk of currency value fluctuations and other risk factors that are present in international investing. (Gibley, 2012)
The value of the US dollar relevant to other currencies is a major consideration for the Federal Reserve. If they prevent large changes in the value of the dollar, firms and individuals can comfortably plan ahead to purchase or sell goods abroad.
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
On the other hand, there is the element of widespread profit from the market of the electronic currency. The ones who [participate...
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
Since the listing of KOSPI 200 futures in May 1996, the derivatives market has grown into one of the key derivatives markets in the world. In the meantime, the market has achieved a higher level of excellence in market operation and secured a trading system and fair market management, and consequently figures as a decent reference among derivatives markets. The brief history of Korean derivatives market related to the products is as follows:
Wang, Jing 2008, ‘Why Are Exchange Rates So Difficult To Predict’, Economic Letter, Vol. 3, no. 6.
...global organizations, demographics and communities are responsible for the large success of the many crypto-currencies on the digital market today. From my discovery of crypto-currencies in late 2013, I have discovered a major trade community with the international population. The crypto-currencies are growing largely in size and popularity. I am concerned over the stability of crypto-currencies - many of types currencies have suffered major capital loss, decrease of market cap, theft, illegal trade etc.. These certain currencies could be a hazardous to deal with in the future. I believe trade and transaction of crypto-currencies should be encouraged on a local, national and global level. Although they have suffered major setbacks in the global economy, I maintain that crypto-currencies have a positive future and that they will undoubtedly affect the worlds economy.
Machiraju (2002,75) explains the basis of this concept in these words, “In competitive markets with a large number of buyers and sellers and low cost access to information, exchange adjusted prices of tradable goods and financial assets must be equal worldwide. This law of one price is enforced by international arbitrageurs who buy low and sell high and prevent all deviations from equality. Four theoretical economic relationships emerge from arbitrage economic activity”.
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...
As the foundation for the foreign exchange process, exchange rates are one of the most important elements in business, both internationally and domestically. Defined as the rate at which one currency may be converted into another, exchange rates are used by countries in order to purchase products or services from one another. When examining these exchange rates it is important to note that their two distinct types of rates used for global trade: nominal and real.