Page 39 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management Mahesh Kumar Sarva, Lovely Professional University

Notes Unit 3: Foreign Exchange Market and Exchange Rates

CONTENTS
Objectives
Introduction

3.1 Evolution of Foreign Exchange Market
3.1.1 Information and Communication Systems
3.1.2 Functions of the Foreign Exchange Market
3.1.3 Participants in the Foreign Exchange Market
3.2 Foreign Exchange Rates

3.3 Exchange Rate Determination
3.3.1 Foreign Exchange Quotations
3.3.2 Cross Rates of Exchange
3.3.3 Spot Market and the Forward Market
3.3.4 Bid Price, Ask Price and Spread in Foreign Exchange Quotation
3.4 Summary

3.5 Keywords
3.6 Review Questions
3.7 Further Readings

Objectives

After studying this unit, you will be able to:
Explain the evolution of foreign exchange market
Discuss the foreign exchange rate
Describe the exchange rate determination

Introduction

International transactions, like domestic transactions, require money flows at some points. In
international transactions, however, money flows often require the use of currencies other than
the national currencies of the parties to the transactions. The Foreign Exchange Market is the
market which accommodates the Currency preferences of the parties involved and helps convert
one Currency into the other Currency. It encompasses all transactions involving the exchange of
different monetary units for each other.
In the Foreign Exchange Market, currencies are bought and sold against each other. Most trading
takes place in a few select currencies – the US dollar, Japanese yen, British pound sterling, Swiss
franc, Canadian dollar, Australian dollar. It takes over two months average trading on New
York Stock Exchange (NYSE) to match one day trading on the forex market. The Indian Foreign
Exchange Market is very small compared to the global 24 hours Foreign Exchange Market.
The Indian turnover is only around $ 5-10 billion/day. Amongst this, Spot transactions constitute
about 50% of the turnover, outright forward 25% and the rest is in Swap transactions.

34 LOVELY PROFESSIONAL UNIVERSITY