INTERNATIONAL FINANCE

FOREIGN EXCHANGE MARKET

Meaning of Foreign Exchange Market

The foreign exchange market is the place where money denominated in one currency is bought and sold with money denominated in another currency. This conversation from one currency to another is 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 the counter exchange and by use of internet.

Functions of Foreign Exchange Market

The Foreign Exchange Market facilitates conversion of one currency into another currency The Foreign Exchange Market is the market in which individual, firms and bank buy and sell foreign currency. It helps the transfer of purchasing power necessary for international trade and capital transaction. It is 24/7 market with no fixed market place.

TYPES OF FOREIGN EXCHANGE MARKET

The types of foreign exchange markets are:Spot market Forward market Derivatives Swaps

Spot market
Meaning of spot market Spot market is a market where, both perishable and non-perishable goods, are sold for cash and delivered immediately or within a short period of time. It also known as cash or physical market.

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 currencies takes place after some period from the date of the deal, it is a deal in forward market The currencies of only the major developed countries are normally traded in the forward market.

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.

Forward contract
A forward contract is an agreement between two parties that at a certain time in the future one party will deliver a pre-agreed quantity of some underlying asset and the other party will pay a pre-agreed amount of money for it.

Futures contract
A future contract is a standardized forward contract. It is also an agreement between two parties to buy/sell an asset at a certain time in the future for a certain price. Examples of commodities that may be traded in this market are: pork bellies, live cattle, sugar, wool, lumber, copper, gold etc.

Options
An option provides the holder with the right (not obligation) to buy or sell a specified quantity of an underlying asset at a fixed price at or before the expiration of the option.

Call Option
A call option gives the buyer/holder the right to buy the underlying asset at a predetermined price (called the strike or exercise price) on or before the expiration of the option.

Put Option
A put option gives the buyer of the option the right to sell the underlying asset at a fixed price on or before the expiration of the option.

SWAP CONTRACT
A contract between two parties in which the parties: (a) promise to make payments to one another on scheduled dates in the future, and (b) use different criteria or formulas to determine their respective payments.

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