In-Depth Analysis: Benefits, Risks, and Regulations of Forex Market

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This report provides an overview of the foreign exchange market, highlighting its benefits, risks, and regulatory environment. It identifies key participants such as central banks, hedge funds, and exporters, and discusses the opportunities for hedging, speculation, and arbitrage. The report emphasizes the risks associated with trading in this market, including the impact of macroeconomic factors and the use of complex financial instruments like derivatives. It also examines the role of regulatory bodies like the NFA, CFTC, and FCA in ensuring fair and ethical practices, reducing counterparty risk, and promoting market liquidity. The report concludes by noting that these regulations benefit all market participants by minimizing the potential for fraud and manipulation.
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Foreign Exchange
Market
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Contents
TASK..........................................................................................................................................................4
c) Benefits of foreign exchange market and identifying risk and challenges of selected market.............4
d) Entities regulate in foreign exchange market and mentioned objectives, who beneficial from their
regulatory activities.................................................................................................................................4
REFERENCES..........................................................................................................................................6
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TASK
c) Benefits of foreign exchange market and identifying risk and challenges of selected market
Foreign exchange markets are a market where people can purchase, sell and exchange
currency. There are many participants in the market with different goals and motives. However,
they can be classified into a few categories to understand better. Central banks, hedge funds,
brokers, banks, exporters and importers are the largest players in this market. This market
provides these participants a platform to buy, sell and exchange foreign currency. They may
choose to do so for hedging, speculation and arbitrage opportunities (Kartal, Depren and Depren,
2021).
Foreign exchange markets are one of the biggest markets in terms of total value and
volume. Therefore, there are major risks and challenges that arises from it. Participants can buy
and sell currency through this market. They can also trade through derivatives (forwards, futures,
options, swaps). Derivatives are complex financial instruments that can provider high leverage to
participants. They are difficult to understand and traded in large volumes. These are major risks
for any participant looking to trade in the foreign exchange market.
Foreign exchange market is a market for currency, therefore there are many risks that
arises from it. Currency prices depend on a variety of macro-economic factors, which are
difficult to predict. The participants need to understand the global economic scenarios to trade in
foreign currencies. Trade policies, wars, pandemics, commodity prices can all impact the prices
of a currency (Ito and McCauley, 2020).
d) Entities regulate in foreign exchange market and mentioned objectives, who beneficial from
their regulatory activities
Foreign exchange market is the largest and most liquid market in the world. However, there isn’t
any central body that governs the forex market; instead, many government and independent bodies
supervise the market. For instance, The National Futures Association (NFA) and Commodities
Futures Trading Commission (CFTC) governs in USA, Financial Conduct Authority (FCA) in
United Kingdom. These bodies regulate forex markets by setting standards which all participants
must comply with. These regulations include being registered and licensed, undergoing regular
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audits, maintaining adequate capital and more. These rules and regulation ensures that the
governing body is ethical and fair to all participants involved (Davis and et.al, 2021).
The governing bodies ensure that the risk for all the participants in the market is minimum. To
reduce counterparty default risk, they use methods like netting and marginalization. Also, setting
standard rules for all trades ensures that market is liquid at all times. These rules benefit all the
market participants greatly, as it reduces their risk and leaves no room for fraud and
manipulation (Chakraborty and Sen, 2021).
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REFERENCES
Books and journal
Kartal, M. T., Depren, Ö. and Depren, S. K., 2021. Do monetary policy measures affect foreign
exchange rates during the COVID-19 pandemic? Evidence from Turkey. BDDK
Bankacılık ve Finansal Piyasalar Dergisi. 15(2). pp.175-202.
Ito, H. and McCauley, R. N., 2020. Currency composition of foreign exchange reserves. Journal
of International Money and Finance. 102. p.102104.
Davis, J. S. and et.al, 2021. Foreign exchange reserves as a tool for capital account
management. Journal of Monetary Economics. 117. pp.473-488.
Chakraborty, J. and Sen, S., 2021. NEXUS BETWEEN FOREIGN EXCHANGE RATES AND
STOCK MARKET INDICES: EVIDENCE FROM INDIA. Journal of Commerce &
Accounting Research. 10(4).
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