The Forward Currency Exchange Market
The Reason for the Market
The forward Currency Exchange Market allows interested parties to trade forward contracts on currencies (Madura, 2006, p117). Forward contracts are an agreement between a firm and a commercial bank to exchange a specified amount of currency, at a specified exchange rate and on a specified date. Forward contracts are being used around the world to mitigate the risk of wildly fluctuating foreign exchange rates in day to day business transactions. Firms use the forward contracts when they know they will need a certain amount of foreign currency at a set date in the future, it allows them to lock in a future exchange rate (Wikipedia, 2006).
There may also be a credit risk associated with foreign exchange currency because a ‘buyer’ is essentially promising to purchase the currency on a future date. The buyer may not be able to complete the transaction simply because the funds are not available at the time. So, in cases where commercial bank does not know a company well, and to protect against the credit risk, they require some form of security (such as a mortgage be put forward or a deposit).
Air Rarotonga is a prime example of where and how forward contracts are used on a regular basis. This airline operates to and from countries and small islands around the Pacific. Air Rarotonga operates its business dealings using New Zealand Dollars, that is they sell their plane tickets, pay salaries and run day to day business transactions using New Zealand Dollars. As with many airlines around the world they must pay for their aviation fuel in U.S. Dollars, therefore exposing them to exchange rate risk between their New Zealand Dollar income stream (from the s...
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...change XML Data. Retrieved 21st April, 2006, from: http://www.ny.frb.org/xml/fx.html
The Federal Reserve Board. (2005) The Global Saving Glut and the U.S. Current Account Deficit. Retrieved 20th April, 2006, from: http://www.federalreserve.gov/boarddocs/speeches/2005/20050414/default.htm
USA Today.com. (2005) Returns from improved U.S.-Europe relations. Retrieved 23rd April, 2006, from: http://www.usatoday.com/news/washington/2005-04-05-us-europe_x.htm
VOA News. (2005) Survey: Negative Views of US, Bush Still Prevail in Europe. Retrieved 23rd April, 2006, from: http://www.voanews.com/english/archive/2005-07/2005-07-28-voa65.cfm
Wikipedia. (2006) Forward Rate Agreement. Retrieved 19th April, 2006, from: http://en.wikipedia.org/wiki/Forward_rate_agreement
Wikipedia. (2006) Speculation. Retrieved 20th April, 2006, from: http://en.wikipedia.org/wiki/Speculation
“Opinion of the United States.” Pew Research Global Attitudes Project. Pew Research Center, July 2013. Web. 30 March 2014.
“The National Debt (sidebar).” Issues and Controversies. Facts on File News Services, 23 Jan. 2009. Web. 25 May 2011. .
Historically, this is outlined in the domestic societal framework (a rationalist point of view dictating political outcomes as a direct result of domestic material interests in society). Whatever society wants, society gets, leaving the consumer is to benefit from a fixed exchange rate. Competition exists between all interests. Whatever interest dominates takes the winning interest. The winning interest, then, determines the outcome. With businesses facing pressure to decrease domestic prices, consumers now have the upper hand. (Wellhausen, 10-2-14). Thus, due to the enhancing credibility of the government, consumers also are to benefit from a fixed exchange rate. (Multiple governments
Mishkin. F. C. (2009). The Financial Crisis and the Federal Reserve. NBER Macroeconomics Annual, 24, 495-508
All but four countries in the world has external debt (“Country Comparison: Debt External”). Having a debt is almost as common as having a mortgage. Since its establishment, The United States has always been in debt (“Historical Debt Outstanding – Annual”). The US national debt has had five sharp increases previously in its history. The reasons include civil car and the two World W...
There is perhaps no other political issue in our contemporary society that is more pertinent, pervasive, and encompassing than a nation’s economy. From the first coins used in Greece and the Asia Minor in the 7th century BCE, to the earliest uses of paper money, history has proven time and time again that the control of a region’s economy is absolutely crucial to maintaining social stability and prosperity. Yet, for over a century scholars have continued to speculate why the United States, one of the world’s strongest and most influential countries, has one of the most unstable economies. Although the causes of this economic instability can be attributed to multiple factors, nearly all economists agree that they have a common ancestor: the Federal Reserve Bank – the official central bank of the United States. Throughout the course of this paper, I will attempt to determine whether or not there is a causal relationship between the Federal Reserve Bank’s monetary policies and the decline of the U.S. economy. I will do this through a brief analysis of the history and role of this institution, in addition to the central banking system in general. In turn, I will argue that the reckless and intentional manipulation of the economy by the Federal Reserve Bank, through inflation and the abolishment of the gold standard, has led to the current economic crisis in the United States.
Weiss, M.A. (2009) ‘The Global Financial Crisis: The Role of the International Monetary Fund’, CRS Report for Congress.
Foreign exchange market is the market for the purchase and sale of foreign currencies. Foreign exchange is highly liquid assets denominated in a foreign currency and facilitates international trade and international transactions. When it comes to trading goods or services internationally, the payment is made by the foreign currency. It has to exchange with the local currency and the exchange will generally take places in the foreign exchange market. The most popular foreign exchange markets are London New
In November of 2004, the United States ran a fifty-four billion dollar trade deficit, translating to over 600 billion for the entire year. This deficit is a result of the disparity between the amount of goods that the US imports and the amount it exports. To equalize this deficit in its current account, the American government sells assets from its capital account, often to foreign investors. This phenomenon is seen as a serious threat to the success and continued growth of the nation’s economy, tied in with popular concerns that the United States is losing its competitive and dominant edge in global economics. The traditional economic theory employed to solve this problem calls for a return to mercantile protectionism, through use of tariffs and subsidies to drive up the price of imports and lower the price of exports. Running contrary to this is a second option: increasing domestic savings and lowering government spending. These theories both aim to decrease American dependence upon foreign imports and investment, and ultimately equalize the enormous trade deficit that currently exists.
control of the supply and demand in the country, the Bank of China buys the dollars and
Floating exchange rate which is also known as fluctuating exchange rate or flexible exchange rate is an exchange rate regime where its currency is determined by foreign exchange market forces such as demand and supply of that currency relative to other currencies.
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
In 1996, the US current account and emerging market plus developing country current account were each about zero. In 2008, US current account was in deficit by $ 600 bn, the emerging market/developing country current account in surplus by $ 900 bn. (sect. 1.1)
Buy and sell in same currency to minimise foreign exchange risk. Alternatively, the buyer can hedge against foreign exchange risk by entering a forward or option foreign exchange contract with a bank.
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...