F Oreign Exchange Market Essay

5365 words - 21 pages

The Foreign Exchange MarketConcepts1. Value Date:The settlement of a transaction takes place by transfers of deposits between two parties. The day on which these transfers are effected is called the Settlement Date or the Value Date.2. Spot Rate:When the exchange of currencies takes place on the second working day after the date of the deal, it is called spot rate.3. Forward Transactions:If the exchange of currencies takes place after a certain period from the date of the deal (more than 2 working days), it is called a forward rate. A trader may quote a forward transaction for any future date. It is a binding contract between a customer and dealer for the purchase or sale of a specific quantity of a stated foreign currency at the rate of exchange fixed at the time of making the contract.4. Swap Transaction:A swap transaction in the foreign exchange market is combination of a spot and a forward in the opposite direction. Thus a bank will buy DEM spot against USD and simultaneously enter into a forward transaction with the same counter party to sell DEM against USD against the mark coupled with a 60- day forward sale of USD against the mark. As the term 'swap' implies, it is a temporary exchange of one currency for another with an obligation to reverse it at a specific future date.5. Bid Rate:The bid rate denotes the number of units of a currency a bank is willing to pay when it buys another currency.6. Offer Rate:The offer rate denotes the number of units of a currency a bank will want to be paid when it sells a currency.7. Bid - Offer Rate:The bid offer Rate is the rate which states both, the price which is the bank is willing to pay to buy other currencies and the price the bank expects when it sells the same currency. Bid and Ask will always be from a bank's point of view. Thus (A/B)bid will denote the number of units of A the bank will pay when it buys one unit of B and (A/B)ask will mean the number of units of A the bank will want to be paid in order to sell one unit of B.8. European Quote:The quotes are given as number of units of a currency per USD. Thus DEM1.5675/USD is a European quote.9. American Quotes:American quotes are given as number of dollars per unit of a currency. Thus USD0.4575/DEM is an American quote.10.Direct Quotes:In a country, direct quotes are those that give unit of the currency of that country per unit of a foreign currency. Thus INR 35.00/USD is a direct quote in India.11.Indirect Quote:Indirect or Reciprocal Quotes are stated as number of units of a foreign currency per unit of the home currency. Thus USD 3.9560/INR 100 is an indirect quote in India.12. Arbitrage:Arbitrage may be defined a san operation that consists in deriving a profit without risk from a differential existing between different quoted rates. It may result from 2 currencies, also known as, geographical arbitrage or from 3 currencies, also known as, triangular currencies.Descriptive questions1.What is foreign exchange market? Explain the...

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