international finance2

8/3/2019 International Finance2

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INTERNATIONAL FINANCE

FOREIGN EXCHANGE MARKET


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Meaning of Foreign Exchange

Market

The foreign exchange market is the place wheremoney denominated in one currency is boughtand sold with money denominated in anothercurrency.

This conversation from one currency to anotheris typical of the transaction that take place in the

foreign exchange market. The foreign exchange market has no place, it

happens in all parts of the world ever thecounter exchange and by use of internet.


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Functions of Foreign Exchange

Market

The Foreign Exchange Market facilitatesconversion of one currency into anothercurrency

The Foreign Exchange Market is the market inwhich individual, firms and bank buy and sellforeign currency.

It helps the transfer of purchasing powernecessary for international trade and capitaltransaction.

It is 24/7 market with no fixed market place.


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TYPES OF FOREIGN

EXCHANGE MARKET

The types of foreign exchange

markets are:-

Spot market

Forward market

DerivativesSwaps


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Spot market

Meaning of spot market

Spot market is a market where, both

perishable and non-perishable goods,are sold for cash and deliveredimmediately or within a short period oftime.

It also known as cash or physicalmarket.


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Forward Market

Meaning of Forward Market:- In forward market, exchange of currencies

occurs on a future date, though the rate is fixed

today. i.e. when the exchange of currenciestakes place after some period from the date ofthe deal, it is a deal in forward market

The currencies of only the major developed

countries are normally traded in the forwardmarket.


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DERIVATIVE

Meaning Derivative:-

A derivative is a financial instrument whose value is derived

from the price of a more basic asset called the underlying asset.

Examples of underlying assets: shares, commodities,

currencies, credits, stock market indices, weather temperatures,

results of sport matches or elections, etc.

Examples of derivatives are: Options

put and call options,forwards and futures.


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Forward contract

A forward contract is an agreementbetween two parties that at a certaintime in the future one party will delivera pre-agreed quantity of some

underlying asset and the other party willpay a pre-agreed amount of money forit.


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Futures contract

A future contract is astandardized forward contract.It is also an agreement

between two parties tobuy/sell an asset at a certaintime in the future for a certainprice.

Examples of commodities thatmay be traded in this marketare: pork bellies, live cattle,sugar, wool, lumber, copper,

gold etc.


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Options

An option provides the holder with theright (not obligation) to buy or sell aspecified quantity of an underlying asset

at a fixed price at or before the expirationof the option.


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Call Option

A call option gives the buyer/holder

the right to buy the underlying asset

at a predetermined price (called thestrike or exercise price) on or before

the expiration of the option.


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Put Option

A put option gives the buyer ofthe option the right to sell the

underlying asset at a fixed price onor before the expiration of theoption.


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SWAP CONTRACT

A contract between two parties in whichthe parties:

(a) promise to make payments to oneanother on scheduled dates in the future,and

(b) use different criteria or formulas todetermine their respective payments.


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