Foreign Exchange Market and Risk 082SIS58 LEE YOUNGHOON

The Foreign Exchange (Currency or Forex or FX) market refers to the market for currencies. Transactions in this market typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The FX market is the largest and most liquid financial market in the world, and includes trading between large banks, central banks, currency speculators, corporations, government, and other institutions.

The foreign exchange market is unique because of its trading volumes. the extreme liquidity of the market. the large number of, and variety of, trader in the market its long trading hours:24hours a day except on weekends the variety of factors that affect exchange rates.

Participants Banks: The interbank market caters for both the majority of commercial turn over and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. commercial companies: An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Retail forex brokers: There are two types of retail brokers offering the opportunity for speculative trading. Retail forex brokers or Market makers. Retail traders(individuals) are a small fraction of this market and may only participate indirectly through brokers or banks.

Factors affecting currency trading Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. Economic factors: These include economic policy, disseminated by government agencies and central banks economic conditions, generally revealed through economic reports, and other economic indicators. Political conditions: Internal, regional, and international political conditions and events can have a profound effect on currency markets. Market psychology: Market psychology and trader perceptions influence the foreign exchange market in variety ways: Flights to quality, Long term trends, “Buy the rumor, sell the fact”

Foreign exchange risk when companies conduct business across borders, they must deal in foreign currencies. Companies must exchange foreign currencies for home currencies when dealing with receivables and vice versa for payables. This is done at the current exchange rate between the two countries. Foreign exchange risk is the risk that the exchange rate will change unfavorably before the currency is exchanged.

Hedge A hedge is a type of derivative, or a financial instrument, that derives its value from an underlying asset. Hedging is a way for a company to minimize or eliminate foreign exchange risk. Two common hedges a re forwards and options. A forward contract will lock in an exchange rate at which the transaction will occur in the future. An option sets a rate at which the company may choose to exchange currencies. If the current exchange rate is more favorable, then the company will not exercise this option

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