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Foreign exchange market : 

2/21/2009 Foreign exchange market - Kevin Foreign exchange market

Features : 

2/21/2009 Foreign exchange market - Kevin Features Market where foreign currencies are traded Round the clock market Global market Large volume of transactions

Participants : 

2/21/2009 Foreign exchange market - Kevin Participants Individuals: tourists, migrants Firms: importers and exporters Banks: short position, long position, square position Governments/ monetary authorities: market intervention International agencies: lending Two tier market: First tier: ultimate customer and banker Second tier: between banks

Classification of participants : 

2/21/2009 Foreign exchange market - Kevin Classification of participants Non-banking entitities: business transactions and hedging Banks: foreign exchange dealers Arbitrageurs: profit seeking from variations in rates in different markets Speculators: profit seeking from movements in exchange rates

Types of markets : 

2/21/2009 Foreign exchange market - Kevin Types of markets Spot market Forward market Derivatives markets: currency futures and options

Spot market : 

2/21/2009 Foreign exchange market - Kevin Spot market Currencies traded for immediate delivery at rates prevailing at the time of transaction Actual delivery (electronic transfer) may take two working days Currency arbitrage: buying a currency at cheaper rate in one market and selling at a higher rate in another market Two point arbitrage Triangular (three point) arbitrage – three currencies Currency speculation: buying and holding a currency for sale at a higher rate in the near future

Forward market : 

2/21/2009 Foreign exchange market - Kevin Forward market Contract for future delivery Hedging: Currencies are bought or sold for forward delivery Reduces foreign exchange risk Speculation: Reap profit from changes in exchange rates in future (difference between forward rates and future spot rates) Arbitrage: Reaping profit from disparity between forward differential and interest rate differential

Futures market : 

2/21/2009 Foreign exchange market - Kevin Futures market It is a derivatives market Currency futures market is of recent origin (1972) Currencies can be bought and sold in the futures market Size and maturity of contracts are standardised Transactions made with the help of brokers through the clearing house Margin deposit and daily marking to the market Hedging: to reduce risk Futures may not provide a perfect hedge ( mismatch in size and maturity) Speculation: to reap short term profit

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