A Crash Course on Foreign Exchange Markets

The demand for one currency into another decides the fluctuation of foreign exchange transactions. The foreign exchange markets have many different participants who differ from scale of their operations as well as objectives and methods of carrying away the functions. Such as;

  • Individuals
  • Institutions
  • Banks
  • Central banks and other official participants
  • Speculators and arbitragers
  • Foreign exchange brokers

There are four major exposures or risks that a corporation faces when it comes to international business.

  • Transaction exposure
  • Economic exposure
  • Translation exposure
  • Tax exposure

There are two types of transactions in foreign exchange market. Spot transactions and forward transactions. In spot market there can be three types of transactions. They are cash, tom and spot exchange.

Price quotation in spot market can be categorized as direct quotes and indirect quotes. A bank can be in three positions in spot market. Long, short and square.

The forward market consists of transactions that require delivery of currency at an agreed on future date. Foreign exchange rate can be defined as price of one currency expressed in units of another currency and rates are quoted as bids and offer rates.

Triangular arbitrage refers to taking advantage of a state of imbalance between three foreign exchange markets. Currency futures markets are standard value forward contracts that obligate the parties to exchange a particular currency on a specific date at a predetermined exchange rate.

Two main differences between future and forward markets

  • Forward markets can be any size while future contracts has to be specific size
  • Forward contracts have relatively wide range of maturities, while future contracts have standardized maturity dates.

There is no perfect foreign exchange forecast or a perfect methodology to forecast foreign exchange rates. The forecasting techniques currently using are;

  • Fundamental forecasting
  • Technical forecasting
  • Assessing market sentiments

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5 thoughts on “A Crash Course on Foreign Exchange Markets”

  1. Susi says:

    nice post. thanks.

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