Professional Documents
Culture Documents
Like any other market, foreign exchange market is a system, not a place. The
transactions in this market are not confined to only one or few foreign
currencies. In fact, there are a large number of foreign currencies which are
traded, converted and exchanged in the foreign exchange market.
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:
ADVERTISEMENTS:
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 be caused due
to exchange rate variations in the future.
ADVERTISEMENTS:
The term spot transaction is a bit misleading. In fact, spot transaction should
mean a transaction, which is carried out on the spot (i.e., immediately).
However, a two day margin is allowed as it takes two days for payments made
through cheques to be cleared.
2. Origin of Money
The foreign
exchange market
operates 24 hours
a day permitting
When intervention in the
major international
foreign exchange
markets at any
point in time.
4. Some FE Customs
Category: Entertainment
Its Characteristics:
Its Characteristics International Money market free from govt. regulations Exist as a savings and time deposit Exists for
short term which makes difficult to manage risk Participants- Govt., Public Sector Organizations Euro dollar market dominates
other currencies
DEPOSITORY RECEIPTS:
DEPOSITORY RECEIPTS A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded
securities. The depositary receipt trades on a local stock exchange. Depositary receipts make it easier to buy shares in foreign
companies because the shares of the company don't have to leave the home state.
OUTRIGHT FORWARDS:
OUTRIGHT FORWARDS An outright forward transaction, like a spot transaction, is a straight forward single purchase/ sale of
one currency for another. There is a specific exchange rate for each forward maturity of a currency, almost always different from
the spot rate. The exchange rate at which the outright forward transaction is executed is fixed at the outset. Outright forwards in
major currencies are available over-the-counter from dealers for standard contract periods or straight dates (one, two, three, six,
and twelve months); dealers tend to deal with each other on straight dates.
Role of the Offshore Deposit Markets for Euro-Dollars and Other Currencies :
Role of the Offshore Deposit Markets for Euro-Dollars and Other Currencies With large and liquid offshore deposit markets in
operation, and with information transfers greatly improved and accelerated, it became much easier and quicker to detect any
significant deviations from covered interest rate parity, and to take advantage of any such arbitrage opportunities. These deposits
trade over the telephone like foreign exchange, with a bid/offer spread, and they have similar settlement dates and other trading
conventions. Many of the same counterparties participate in both markets, and credit risks are similar . For currencies not traded
in the offshore Eurocurrency deposit markets in London and elsewhere, deposits in domestic money markets may provide a
channel for arbitraging the forward exchange rate and interest rate differentials
EURO DEPOSITS:
EURO DEPOSITS The Euro currency market has its origins in time deposits - whereby cash was held in a banking system
outside the country of that currencys origin. Euro time deposits generally range from 7 days to 6 months. Banks receiving
Eurocurrencies use them to make loans to international and supranational financial institutions, governments, companies and to
each other The risks of holding euro-deposits are accentuated by the fact that, on average, euro-deposits tend to have shorter
maturities than euro-loans. Euro-deposits are free from reserve requirements and most other national regulations, and as their
attractiveness for hedgers and speculators moves funds into the market, Central Bank control of financial intermediaries declines.
EURO SECURITIES:
EURO SECURITIES As well as euro deposits, money market securities can be euro securities. Such securities include: - Euro
commercial paper (ECP) - Euro certificates of deposit (euro CD) - Euro notes - International repos Whatever the instrument used,
the issuers aims are similar: -To widen the investor base beyond its domestic market, -To avoid the regulatory restrictions of its
domestic market
ADR:
ADR It is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars.
However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example,
dividend payments in Euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in
accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq .
GDRs:
GDRs Prices of GDRs are often close to values of related shares, but they are traded & settled independently of the
underlying share. Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New
York. They trade on the International Order Boo