Page 54 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 3: Foreign Exchange Market and Exchange Rates

8. In trading between freely convertible currencies, the size and frequency of transactions Notes
are major factors affecting the costs and risks that underlie the …………………… Spreads.
9. A ………………… is the price in one Currency at which a dealer will buy another Currency.

10. If the forward rate is higher than the existing Spot rate in the Forward Market, the Currency
is trading at a forward …………………….
11. If the forward rate is lower than the existing Spot rate in the Forward Market, the Currency
is trading at a forward …………………….
12. A Spot transaction can be defined as an agreement to buy or sell a specified amount of a
foreign Currency within …………………… business days of the transaction.
13. The Spot exchange market is an …………………… market.
14. …………………… quotations refer to the Price of foreign Currency in terms of one unit of
home Currency.
15. Direct Quotations are also known as …………………… quotes.

Case Study Foreign Exchange

he Foreign Exchange Market is all set to welcome the FX portals that are sure to
revolutionise the way Forex trading would take place in future. Their viability
Twould depend on the way participants would embrace them and on the competition
that would ensue. The two portals that have hit the market amid great fanfare are FX all
and Atriax. By providing a sufficient range of currencies to the players to allow ease of
execution and by giving access to a range of prices from different sources at all times, these
portals are aiming to garner liquidity. Instead of being in a win-lose situation, a win-win
scenario could emerge if both the systems would work in tandem and manage to capture
a large enough portion of the growing Foreign Exchange Market pie. Forex trading itself
is expected to zoom because of growing B2B transactions over internet as the investors are
going global and holding greater foreign securities in their portfolios. Therefore, a more
price sensitive and web-enabled Foreign Exchange Market would emerge, which in turn
would result in transactions that are complex to liquidate and time consuming to settle.
For the automated marketplace where information need looms large, lies the answer in
the form of such portals.

The success of these platforms would depend on a host of factors such as their automatic
execution, the method of providing prices to the users, the number of partnership
agreements that the portal has, the number of banks it caters to, etc. The other important
feature will be their pricing engines. The quality of the pricing engine, its ability to handle
huge volume of transactions and the quality of transaction services, such as ease of
settlement, pre-trade information etc. will all determine their fate.
However, from the user’s point, the problem that emerges is would the cost of settling
with multiple counter parties (as opposed to just using one or two lead banks for FX
trading) come in the way of using a multiple price service? But the customers have been
working on integration with a single bank for long, these FX platforms should be attractive,
as they will only have to make one investment to access multitude of dealers.

However, for such electronic trading to gather momentum, users need to shift from
telephone-based to screen-based trading which would be a tough task. Then they are to be
Contd...

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