Currency Markets BY: ALCANTARA, REA MAE C.

Currency Markets Currency market facilitates international trade by providing exchanges for investing across markets valued in different currencies. International currency markets are large and liquid

International currency transactions do not occur on a single exchange, but in a global computer network of large banks and brokers from around the world. Currency market is also known as the Foreign Exchange Market (FOREX)

FOREX The Foreign Exchange Market can be defined in terms of specific functions, or the institutional structure that: (1) Facilitates the conversion of one country’s currency into another. Through the buying and selling of currencies. Allows global firms to move in and out of foreign currency as needed.

(2) Sets and quotes exchange rates. This is the ratio of one currency to another. These rates determine costs and returns to global businesses. (3) Offers contracts to manage foreign exchange exposure. These hedging contracts allow global firms to offset their foreign currency exposures and manage foreign exchange risk. Thus, they can concentrate on their core business.

What you can do in the Forex Market: Be a Trader OR Be an Investor

Quick Review of Market Characteristics World’s largest financial market. Estimated at $3.2 trillion dollars per day in trades. Market is a 24/7 over-the-counter market. There is no central trading location. Trades take place through a network of computer and telephone connections all over the world. Most popular traded currency is the U.S. dollar. Currencies are either traded for immediate delivery (spot) or some specified future delivery (forward). large commercial banks are the dominant players in the forex market

ISO Currency Designations All foreign currencies are assigned an International Standards Organization (ISO) abbreviation. E.g., USD; JPY; GBP; EUR; AUD; HKD; CNY; MXN; SGD; ARS; THB; INR; NZD etc.

Since the exchange rate is simply the ratio (i. e Since the exchange rate is simply the ratio (i.e., value) of one currency against another, market makers express this relationship using the two currencies’ ISO designations. For Example: USD/JPY USD/MXN (Mexican Peso) EUR/USD GBP(british pound)/USD

CASH MARKET a marketplace for the immediate settlement of transactions involving commodities and securities. the exchange of goods and money between the seeler and the buyer takes place in the present, as opposed to the future market where such an exchange takes place on a specified future date

DERIVATIVES MARKET the financial market for derivatives a derivative is a security with a price that is dependent upon or derived from oneor more underlying assets. a contract between two or more parties based upoin the the asset or assets.

CASH MARKET VS. DERIVATIVES MARKET 2) Holding period When you buy shares in the cash segment, you can hold the shares for life. This is not true in the case of the futures market, where you have to settle the contract within three months at the very maximum.

When you buy shares in the cash segment, you normally take delivery and are a owner. Hence, you are entitled to dividends that companies pay. No such luck when you buy any derivatives contract.

4) Risk Both, cash and futures markets pose risk, but the risk in the case of futures can be higher, because you have to settle the contract within a specified period and book losses.

5) Investment objective differs You buy a contract in the derivatives market to hedge risk or to speculate. Individuals buying shares in the cash market are investors. In the derivatives segment you buy a lot, while in the cash segment you buy shares.

7) Margin money In the derivatives segment you pay only margin money for example, if you buy 1 lot of Punjab National Bank (4000 shares) you just pay 15 to 20 per cent of the cost of the 4,000 shares and not the entire amount.