Week 6 Assignment: A Deep Dive into the Foreign Exchange Market

This essay defines the foreign exchange market as an international network for currency trading, highlighting its lack of physical location and time boundaries. It details the market's role in determining exchange rates and facilitating international money exchange. The essay outlines the market's functions, including transferring purchasing power, providing credit, and minimizing foreign exchange risk. It distinguishes between interbank and retail markets, identifies key participants such as dealers, commercial entities, arbitragers, and central banks, and classifies transactions based on spot, forward, and swap arrangements. The essay concludes by referencing relevant academic sources on the foreign exchange market and its dynamics. Desklib provides this essay and many other resources for students.

Running Head: FOREIGN EXCHANGE MARKET
Foreign Exchange Market
Name of the Student
Name of the University
Author note

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FOREIGN EXCHANGE MARKET
The foreign exchange market is defined as an international network where traders involve
in buying and selling currencies. There is neither a physical location nor a time boundary for
operation of foreign exchange market. The international foreign exchange market offers a
physical and institutional structure for exchanging money between countries. In the market the
exchange rate of currencies are determined between countries and the any transactions are
physically completed (Butler, 2016). Transaction in international exchange market is a
settlement between seller and buyer determining the amount of one country’s currency that is to
be exchanged at a specific rate for other country’s currency.
The international foreign exchange market expanded across the globe. It accounts
movement of price and currencies that are traded every hour of business day around the world.
Globally, trade in USD, DEM and JPY dominates the foreign exchange market. Major markets
include London, Tokyo and New York (Hsu, Taylor & Wang, 2016). The main functions of
foreign exchange markets are discussed below
Transferring purchasing power: This is one of the important aspect of international transaction.
This is because in the international transaction the engaged parties come with different national
currencies. Each party of the transaction wants to make the deal in their own currency. However,
transaction can be invoiced only in one currency. Therefore, purchasing power needs to be
adjusted.
Provision for credits: International transaction, which involve cross border movement of goods
usually takes time. Therefore, financial assistance needs to be provided to support inventory.

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FOREIGN EXCHANGE MARKET
Minimize risk of foreign exchange: The institutional framework presents in the foreign exchange
market help to minimize the risks involved in any international transaction. The risks can be pass
on to some else through the hedging facilities provided by the foreign exchange market.
The transaction in foreign exchange market are classified in two categories: interbank or
wholesale market and retail or client market. The interbank or wholesale market involves a
network of banks trading currencies with each other. The transactions made through interbank is
usually of large sum of money, multipliers of USD millions or an amount equivalent to this in
terms of some other currency. The main participants in foreign exchange market are dealers of
foreign reserves, parties involved in commercial and investment transaction, arbitragers and
speculators, treasuries and central banks, brokers of foreign exchange market (Gabaix &
Maggiori, 2015).
The transactions in foreign exchange market is undertaken either on spot or on forward or
on swap basis. The spot exchange rate involves delivery of foreign exchange on spot. The date
on which spot exchange are settled is called value date. The spot transactions are considered as
single most important type of transaction constituting 43% of all transaction. The forward
contracts settle transaction for a future date. The transaction in the future data is accomplished
with the pre-specified amount. 9% transaction of foreign exchange market is based on forward
contacts (Wojcik, MacDonald-Korth & Zhao, 2014). Swap transaction making 48% of all
transactions in foreign exchange market involve simultaneous occurrence of purchase and sales
of an amount of foreign exchange for two different dates.

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FOREIGN EXCHANGE MARKET
References
Butler, K. C. (2016). Foreign Exchange and Eurocurrency Markets. Multinational Finance:
Evaluating Opportunities, Costs, and Risks of Operations, 35-60.
Gabaix, X., & Maggiori, M. (2015). International liquidity and exchange rate dynamics. The
Quarterly Journal of Economics, 130(3), 1369-1420.
Hsu, P. H., Taylor, M. P., & Wang, Z. (2016). Technical trading: Is it still beating the foreign
exchange market?. Journal of International Economics, 102, 188-208.
Wojcik, D., MacDonald-Korth, D., & Zhao, S. (2014). The Geography of Foreign Exchange
Trading: Currencies and International Financial Centres.