module iv - introduction to exchange rate mechanism

8/17/2019 Module IV - Introduction to Exchange Rate Mechanism

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Introduction to Exchange

Rate MechanismMODULE IV


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Introduction

Foreign exchange is the system or process of converting one national currency to another and of transferring money from one country to another

!he foreign exchange mar"et is a mar"et in #hich national currencies are $oug

and sold against one another%

&urrency names are shortened to ' letters to meet the needs of screen($ase

ta$les% !hese #ere developed $y the International Organi)ation f*tandardi)ation and are called I*O codes or *+IF! codes%

It performs three important functions ,(

!ransfer of -urchasing po#er

-rovision of &redit

-rovision of .edging facilities


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Introduction

!ransfer of -urchasing po#er ( It is the primary function of a foreigexchange mar"et /!ransfer of purchasing po#er from one country tanother and from one currency to another0

-rovision of &redit ( !he credit function performed $y forex mar"et plays an important role in the gro#th of foreign trade for internation

trade depends to a greater extent on credit facilities% -rovision of .edging facilities ( .edging refers to covering of foreig

trade ris"s and provide a mechanism to exporters and importers tguard themselves against losses arising from 1uctuations in exchangrates


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Introduction

!he foreign exchange mar"et is uni2ue $ecause of,

its trading volume

the extreme li2uidity of the mar"et

the large num$er of and variety of traders in the mar"et

its geographical dispersion

its long trading hours ( 34 hours a day 5except on #ee"ends6%

the variety of factors that a7ect exchange rates


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-articipants In Forex Mar"et

&ommercial 8an"s

8ro"ers 9 &ustomers

&entral 8an"s

:on ;8an" Forex &ompanies


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&OMMER&I


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&E:!R


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:O:(8


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Exchange Rate Determination

E2uili$rium of Exchange RateA DD for FE 9 ** of FE

DD for FE arises $ecause,

Import of goods and services

FDI in other countries

-ayment $y one government to other for settlement of transactions%

other out1o#s

** of FE arises $ecause,

&ountry exports goods and services to other countries

in1o# of foreign capital

payment made $y other countries

other types of in1o#s


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!ypes Of !ransactions In ForexMar"et

*-O! 9 FOR+


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*-O! ( !he transactions are completed on the spot or immediately !his trade represents a /direct exchange0 $et#een t#o currencies hathe shortest time frame involve the cash rather than a contract%

FOR+


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FU!URE* ,

Foreign currency futures are exchange traded for#ard transactions #itstandard contract si)e and maturity dates%

Futures are standardi)ed and are usually traded on an exchange createfor this purpose%

Futures transactions are usually inclusive of any interest amounts%


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O-!IO:* , 5 F@ Option6

F@ Option is a derivative #here the o#ner has the right $ut not theo$ligation to exchange money denominated in one currency in toanother currency at a pre(agreed exchange rate on a speciCed date%

Fx option mar"et is the deepest largest and most li2uid mar"et for

option of any "ind in the #orld%


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module iv - introduction to exchange rate mechanism

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