This website uses cookies to ensure you have the best experience. Learn more

Foreign Exchange Market Essay

1707 words - 7 pages

Foreign Exchange Market

The foreign exchange market is one of the most important financial markets. It affects the relative price of goods between countries and so can affect trade. It means that it affects the price of imports and so affects a country’s price level (inflation rate). It also affects the international investment and financing decision. In this project, we will try to find why exchange rate would give many risks to a company and how a company can hedge itself.

Definition of Exchange Rate

The price of one currency expressed in terms of another currency is called an exchange rate. With the price it is normal to quote them as the price for one unit of the good. The price of a jacket is how much you have to pay to get 1 jacket. The price of a car is how much you pay to get 1 car. The exchange rate between AUS and US from AUS’s point of view is how many AUS dollars you have to pay to get 1 US dollar. Since you have to pay about AUS$1.55 to get 1 US dollar the exchange rate between AUS and US is 1.55. In this case, the US dollar is the “commodity” currency and the AUS dollar is the “terms” currency.

We denote this SAUS/US=1.55. If a currency appreciates it becomes worth more and so you need less of it to buy one unit of another currency. This makes imports cheaper. For example, if the AUS dollar appreciates then SAUS/US will fall from 1.55. On the other hand, If a currency depreciates it becomes worth less and so you need more of it to buy one unit of another currency. This makes imports more expensive. For example, if the AUS dollar appreciates then SAUS/US will rise from 1.55.

Why does FX give risks to a company?

Every daily exchange rate is changing over time. It might fluctuate slightly or go up and go down sharply. On the diagram1 is the daily exchange rate between AUS dollar and US dollar from 4 January 1999 to 17 March 2000. It shows that it fluctuates over time and the spread is from 0.6018 to 0.6738. If we consider this point, we can see how important the exchange is. For example, if the yearly international sales are $10 million US dollars and if the exporter wants to convert US dollars into AUS dollars, he/she may need to hedge for himself/herself. If the exporter can buy a forward contract in a year time at SUS/AUS=0.6138 in 1 January 1999, he/she will receive $AUS16.3 million dollars in 1 January 2000. However, if the exporter does not do anything about it, the exchange rate is SUS/AUS=0.6583 and he/she will only receive $AUS15.2 million dollars. There is a large difference between those two strategies about $AUS1.1 million dollars. Thus, we can how large the difference is.

However, there are still many other effects to affect the exchange rates such as:

Economic conditions
Government policies

Economic Conditions

A country’s economic condition has a great effect on the exchange rate such as inflation rate, interest rate. From theory, it can be observed in the...

Find Another Essay On Foreign Exchange Market

FOreign exchange market Essay

5365 words - 21 pages 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

Australia’s Financial Market: Foreign Exchange Market

1694 words - 7 pages How does the Foreign Exchange Market operate? The foreign exchange market, also known as forex, FX, or currency market is a global decentralized market for trading of currencies and operates on several levels, with the foreign Exchange market being the biggest financial market in the world, and the Australian foreign exchange market ranking seventh in the world. Australia has strong foreign trade links with Asia, United States, New Zealand

Report on Foreign Exchange market of Japan

2238 words - 9 pages Report on Foreign Exchange market of JapanTable of Contents3Executive summary 4Introduction 5Foreign Exchange Market of Japan 5Fluctuation in Yen "between" 2007-2009 9Determinants of Currency movements 12Forecasting Japanese currency Yen over 2010 14Conclusion 15References Executive summaryThis report provides an in depth analysis of Forex market trend of the Japan especially from 2007to 2009. The Forex market of Japan is very volatile i.e

Risk Management and The Foreign Exchange Market

4993 words - 20 pages = 1.2355 - 60Some market jargon:The above rates would be described in the markets thus - "the Aussie is sixty two thirty-thirty five" and the "Kiwi is seventy - seventy five" and the "Cable" is 1.2360 . USD is known as the "Dollar" or the "Big Dollar"`, depending on the country you are working in. In practice, an indirect quote in the market usually means that the USD is the terms currency in the quote.2.1.3 Net foreign exchange positionNet

Currency and Interest Rate Swap: A Case Study of the Australian Foreign Exchange Market

3038 words - 12 pages mode of financing in the foreign exchange market, the paper also aims at discussing the types and importance of swapping in the attaining of the organisations objectives. This will essentially facilitate the stability in the financial rates offered by the different financial organizations world wide and therefore lead to the facilitation of increased profit margins and rise in the growth rates of the world economies.ObjectivesThe overall objective

Factors Influencing The Exchange Rate

649 words - 3 pages foreigners to buy. 3. Foreign currency policy Market exchange rate is set through the mechanism of supply and demand for the currency. Also, this depends on a certain amount of faith in the currency. 4. Real Interest rate If the country has a high interest rate, then it attracts lenders by offering higher return relative to other countries. Thus, higher interest rates attract foreign capital and cause the exchange rate to rise since demand for

International Risk

637 words - 3 pages affects globalization, particularly in international investment, is foreign interest rates. When investing, corporations want the highest interest rate. The global market with the best rate may receive the most investing. Also, foreign interest rates have a distinct impact on foreign exchange rates.When operating in foreign markets, the organization must take into consideration the necessary accounting methods. These methods are affected by

International Business

806 words - 3 pages entering into a contract and the settlement of the contract. The second type of foreign exchange rate risk is economic risk. Economic risk arises because rate fluctuations can often affect the competitive position of the company. An example of how this can occur deals with a foreign currency falling in price relative to the US dollar. In this instance, the foreign market can compete more strongly in the US market. Mitigation of Foreign Exchange Risk

Foreign Exchange

1023 words - 5 pages 2.2 Foreign Currency Exchange (FOREX) The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks. Financial centers around the world play a role as main of trading between a wide range of different types of buyers and sellers around the worlds . Electronic Broking Services (EBS) and Reuters 3000 Xtra are two

self

985 words - 4 pages typically happens in a competitive market or when a foreign buyer wants to use their local currency(Trade Finance Guide). However, most times this problem is avoided because, traders want to deal in American Currency (Trade Fiance Guide). The Trade Finance Guide reports that some foreign buyers prefer their currency over the US dollar(Trade Fiance Guide) “Exchange risk may arise because of exchange rate movements in the period from the original

Determining the Foreign Exchange Rate

1143 words - 5 pages 3.1 Determinants of Exchange Rate Foreign exchange rate is the price of a unit of foreign currency in terms of the domestic currency . In a floating exchange rate mechanism, foreign exchange rate is determined in the same way like the price of any other commodity in a free market economy. Thus, change in the value of the domestic currency relies on factors like foreign exchange reserves, money supply in the economy, the central bank’s policies

Similar Essays

The Foreign Exchange Market Essay

1308 words - 6 pages 1.0 Introduction to Foreign Exchange Market There is one thing that differentiates the international business with the domestic business where it uses more than one currency in the commercial transaction. For example, if a company from British purchases some goods from a company from US, the international transaction will require for exchanging pounds and U.S. dollars which involve the foreign exchange market. In the foreign exchange market, any

The Foreign Exchange Market Essay

1215 words - 5 pages Before the times of the foreign exchange market, the world depended on the gold standard to determine the value of goods and services. This paper will describe in more detail the gold standard, the positive and negative aspects of using the gold standard and in addition the paper will summarize the major functions of the world’s major foreign exchange markets. The gold standard was a monetary system that many countries used in order to

Foreign Exchange Market Essay

1126 words - 5 pages Foreign Exchange Market PAGE 3 Tommy JamesAxia CollegeNovember 16, 2008Good evening and welcome students to tonight's discussion about how business gets done. International business transactions in today's market are very complex, so today I will be discussing with you just how they get done. When thinking about international business you are thinking about trading, investing, and buying stocks from other well established businesses. In order

Foreign Exchange Market Essay

1920 words - 8 pages Foreign Exchange Market PAGE \* MERGEFORMAT 4 Alfred Del ValleForeign Exchange MarketAxia College of University of PhoenixIn view of the fact that the international business environment is not set up with a worldwide medium for exchange, the foreign exchange market is a necessity for international trade. The major functions of the foreign exchange market are to transfer purchasing power, allocate open trade for international markets, monitor