The term paper I am going to discuss is about the foreign exchange markets : Definition : The foreign exchange market is the organizational framework within which individuals, firms and banks buy and sell foreign currencies or foreign exchange. The exchange rate of a currency in the market depends on economic factors, political conditions of the countries and the market psychology. Functions of Foreign Exchange market : The basic and primary function is to transfer purchasing power between countries.
The transfer function is performed through draft, bill of exchange, letter of credit etc.. Another important function is to provide credit to the importer debtor. The foreign exchange market performs the hedging function covering the risks on foreign exchange transactions. Geographical Extent of Foreign Exchange Market : * Global Currency trading is a 24 hour a day process * Many large International banks operate trading rooms in major trading center on a round –the-clock-basis. Some currency trading is conducted on an official trading floor by open bidding but most of it is done through dealers. Market Participants : There are five main categories of market participants in the foreign exchange market : * Bank and Non bank foreign exchange dealers * Individual and firms conducting commercial and investment transactions * speculators and Arbitrageurs * Central banks and Treasuries * Foreign Exchange Brokers. Terms Used in the foreign exchange market : Spot rate is the exchange rate quoted for delivery of foreign currency at some specified time in the future.
Forward rate is the rate that appears in a contract to exchange a currency in the future and whereas the cross rate are the exchange rate between two currencies that are not official currencies of the country that the exchange was quoted in. Bid rate is the price to the buyer and ask price is the price to the seller in the exchange market. Exchange arbitrage involves the simultaneous purchase and sale of a currency in different foreign exchange markets. And other terms involved are forward premium, forward discount, direct and indirect quotes.