Analyzing Forward Exchange Market's Impact on International Trade

This essay provides a comprehensive analysis of the forward exchange market and its crucial role in international trade. It begins by defining international trade and the significance of currency exchange, particularly in the context of floating exchange rates. The essay then delves into the forward exchange market, explaining its function in facilitating forward contracts and mitigating currency risks for importers and exporters. It highlights the benefits of this market, such as providing certainty in exchange rates, protecting businesses from currency fluctuations, and promoting healthy trade relations. The essay also discusses the impact of exchange rate changes on international trade and the importance of the forward exchange market in managing these risks. Finally, the essay concludes by emphasizing the essential role of the forward exchange market in fostering the growth and stability of international trade.

International trade
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Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
TASK...............................................................................................................................................3
Discuss the key activity of forward exchange market & its various benefits to international
trade........................................................................................................................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
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INTRODUCTION
Main objective of writing this essay is to better understand the concept of international trade.
It is the exchange of goods and services across the international borders. Every country produce
goods and services on which the domestic opportunity cost is lower as compare to the domestic
opportunity cost of other countries and exchange those goods and services for products that have
higher domestic opportunity cost. In other words it can be say that any economic transaction
between different countries is international trade. The transactions of international trade are
facilitated with the help of international financial payments. For this the private bank and central
bank play an essential role. The purpose of the essay is to effectively analysis the importance of
forwards exchange market for international trade. It is a market for contracts between the traders
which ensure the future delivery of a foreign currency at a specified exchange rate (Bilson and
Marston, 2019). The price of forward contract is known as the forward rate. Forward market is
related to the exchange of forward and future contract. This essay includes the concept of
forward exchange market and its work for international exporters in the floating exchange rate
system. Other than this it includes various importance of forward exchange market for
international trade are discussed in this essay.
MAIN BODY
TASK
Discuss the key activity of forward exchange market & its various benefits to international trade.
Trade refers to an activity which includes buying and selling of goods and services
between people, firm and countries. While international trade refers to exchange of capital,
goods and services between different countries (Hiscox, 2020). It allow countries to expand their
market area and also access those goods and services which are not domestically available
because of this the international market is more competitive pricing and provide cheaper
products to consumer. The concept of international trade is include two important activity which
are import and export. When a country sold any product and service to the global market that it is
called export and when a country purchase any kind of goods and services from the global
market it is called import (Feenstra, 2019).
Forward exchange market refers to an over- the-counter marketplace which set a fix price
of goods for future delivery (A.X.Y and et. al. 2019). Main use of forward market is for trading a
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range of instruments or goods, but currently this term is used in the foreign exchange market. As
forward exchange is also apply to markets for securities and interest rates and also for the
commodities. Main work of forward market is to provide a leads for the creation of forward
contract. Forward contract is some kind similar to future contract. There is a little difference
between both as forward contract will be customized according to the requirements of customers,
while future contract have standardized features based on the contract size & maturity. Forward
exchange market deal between the bank and a bank of customer. Prices in the forward market is
based on interest rate (Kenen, 2019).
Floating exchange rate means when the currency value of a country is set by the forex
market based on supply and demand as compare to currencies of other countries (Krugman,
Obstfeld and Melitz, 2018). In other words not like fixed exchange rate which is determine by
the government by a floating exchange rate is determine by supply & demand on the open
market. Government and central bank are always try their best for keep their currency price
favourable in the international trade. This exchange rate will influence the growth of trade and
also have a great impact on the importer and exporter. This is because it is a long-term change in
currency price which is reflect because of economic strength and interest rate which is different
from country to country. Any change in this rate will affect the trade and ability to pay debts.
Importer and exporter refers to the person or an organisation who buy and sell goods and
services in exchange of money (Moon, 2018).
Forward exchange market play an essential role in a healthy and development of
international trade. It deal between the importer and exporter banks and fixed an amount of
exchange rate for the future delivery. As the future is uncertain and the exchange rate or the
value of a country is any time changes, it can be increase or also be decrease. If the exchange
rate get increase the exporter will earn higher profit while the importer face a huge amount of
risk. While if the exchange rate will decrease than the importer needs to pay less which will
reduce the profit margin of exporter (Nan and Kaizoji, 2019). This problem will have a great
impact on international trade. Forward exchange market create a contract for future transaction in
which the rate is already decided between the parties. This contract will provide certainty to
business over the exchange rate which is decided on the bases of mutual understanding (Potì,
Levich and Conlon, 2020). The most important benefit of forward exchange market is that it
provide protection to businesses and their profit margin from foreign currency downside market.
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It help in reducing the level of uncertainty from the international trade and try to develop a
healthy and fair trade between the countries. Sometime traders feel bad because of favourable
exchange rate as they need to consider their forward contract or their agreed exchange rate. Main
objective of this market is reduce the conflict and disputes between traders and promote a
healthy trade (Wei and et. al. 2019).
CONCLUSION
From the above discussion on this report it is concluded that forward exchange market
play an essential role in the growth and development of international trade. As it create a contract
between the parties who buy and sell goods and service and pay for goods in the future. The
future is uncertain and it is quite possible that the foreign exchange rate will change. Any change
in this rate will create conflicts between the parties and also affect their profit margin. While it
help in deciding a fixed rate of exchange which will maintain certainty in business and also
promote international trade.
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REFERENCES
Books & Journal
Bilson, J.F. and Marston, R.C. eds., 2019. Exchange rate theory and practice. University of
Chicago Press.
Feenstra, R.C. ed., 2019. The impact of international trade on wages. University of Chicago
Press.
Hiscox, M.J., 2020. International trade and political conflict. Princeton University Press.
Kenen, P.B., 2019. Trade, speculation, and the forward exchange rate. In Essays in International
Economics (pp. 183-209). Princeton University Press.
Krugman, P.R., Obstfeld, M. and Melitz, M.J., 2018. International trade: theory & policy.
Pearson Education Limited.
Moon, B.E., 2018. Dilemmas of international trade. Routledge.
Nan, Z. and Kaizoji, T., 2019. Market efficiency of the bitcoin exchange rate: Weak and semi-
strong form tests with the spot, futures and forward foreign exchange rates. International Review
of Financial Analysis. 64. pp.273-281.
Potì, V., Levich, R. and Conlon, T., 2020. Predictability and pricing efficiency in forward and
spot, developed and emerging currency markets. Journal of International Money and
Finance. 107. p.102223.
Wei, L., and et. al. 2019. Bank risk aggregation with forward-looking textual risk
disclosures. The North American Journal of Economics and Finance. 50. p.101016. Mah,
A.X.Y., Ho, and et. al. 2019. Review of hydrogen economy in Malaysia and its way
forward. International Journal of Hydrogen Energy. 44(12). pp.5661-5675.
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