Foreign Exchange Market Essay - 1629 Words

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†¦show more content†¦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 covered interest parity, uncovered interest parity and purchasing power parity. We all know that at a booming period, the exchange rate should appreciate that is bad to exporters and at a recession period, the exchange rate should be depreciate that is bad to importers. However, the following case is to illustrate that when the exchange is depreciating, thereShow MoreRelatedForeign Exchange Market5177 Words   |  21 Pageseuro? 2. Currently, in the spot market $1 = 106.45 Japanese yen, 1 Japanese yen = 0.00966 euro, and 1 euro = 9.0606 Mexican pesos. What is the exchange rate between the U.S. dollar and the Mexican peso? 3. A currency trader observes the following quotes in the spot market: 122 Japanese yen = 1 U.S. dollar 2.28 Swiss francs = 1 British pound 1 British pound = 1.6542 U.S. dollars Given this information, what is the exchange rate between the Swiss franc (SF) andRead MoreIntroduction Of The Foreign Exchange Market1610 Words   |  7 PagesIntroduction to the Foreign Exchange Market As the leading financial market in the world, the Foreign Exchange Market consists of several types of financial institutions, such as, investors, such as, central banks, brokers, and investment firms. The Foreign Exchange Market does not have an actual physical location; it is a worldwide system of computers. Currency traders are linked together from all over the world by these computers. 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The Foreign Exchange Market does not have an actual physical location; it is a worldwide system of computers. Currency traders are linked together from all over the world by these computers. Once currency traders enter the network, the computers allow themRead MoreForeign Exchange Market of Bangladesh7676 Words   |  31 Pages1. Introduction 1.1 Objective Objective of this report is to give an overview of the Foreign Exchange Market. 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Foreign Exchange Market1550 Words   |  7 Pagestraveled to a foreign country—preferably outside the tourist traps—and spent money, you probably had to exchange your domestic money for local currency. Regardless of where you made such a trade, such as at a currency exchange kiosk when you landed at the airport, the fact that you successfully transacted two, completely distinct currencies related by an exchange rate means that you were, for the briefest of moments, a participant in the nearly $4-trillion-a-day foreign exchange market, or forex. But