Exchange Market as a Part of International Financial Markets, Participants and Functions of Exchange Market Matúš Czakó Ján Lajda

Structure: Global Financial Markets Foreign Exchange Market Nature of Foreign Exchange market Functions of Exchange Market Types of Exchange markets Market Participants

Global Financial Markets ► The global financial markets include the market for foreign exchange, the Eurocurrency and related money markets, the international capital markets, notably the Eurobond and global equity markets, the commodity market and last but not least, the markets for forward contracts, options, swaps and other derivatives ► The aim of Financial Market is to construct a story employing the most current state of the art in the markets themselves with a solid foundation of theory.

Global Financial Markets ► The institutions that dominated global finance in earlier decades - commercial banks and supranational organizations have been displaced by disintermediated, private finance. ► There has been shift of expertise and market power away from banks and towards corporations. ► Many have developed capabilities in risk management instruments, such as options, swaps and more complex derivatives.

Foreign Exchange Market ► The foreign exchange market is where currency trading takes place. ► It is where banks and other official institutions facilitate the buying and selling of foreign currencies ► FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another

Foreign Exchange Market ► Now, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. ► The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc., and the need for trading in such currencies.

Nature of Foreign Exchange market ► The foreign exchanged is a universal network of brokers, banks, businessmen and the exchange owners who are connected with a system internationally so any one connected to the foreign market which can involve in the different business of foreign exchange rates. ► It is very diversified and different for the business purpose. ► The main characteristics of the foreign exchange market are that it does not take any rest it is the continuous business in the world.

Functions of Exchange Market ► The basic and primary function of a foreign exchange market is to transfer purchasing power between countries ► Another important function of foreign exchange market is to provide credit to the importer debtor ► The foreign exchange market performs the hedging function covering the risks on foreign exchange transactions

Functions of Exchange Market ► here are two foreign exchange perspectives: ► 1. Competitive market : Real world Foreign Exchange market confirm closely to the market that is competitive by nature. ► 2.Linkages to the domestic and foreign prices: The market price or the exchange rate a nations‘ currency is an unusual price. It links all the domestic with the foreign prices

Types of Exchange markets ► 1. ► 1. Spot market : It is a securities or commodities market where goods, both perishable and non-perishable, are sold for cash and delivered immediately or within a short period of time. It is a securities or commodities market where goods, both perishable and non-perishable, are sold for cash and delivered immediately or within a short period of time. ► 2. ► 2. Forvard market: Forward contracts are personalized between parties and therefore not frequently traded on exchanges. The forward market is a general term used to refer to the informal market in which these contracts are entered and exited.

Types of Exchange markets ► 3. ► 3. Derivatives market: It is meant as the market where exchange of derivatives takes place. Derivatives are one type of securities whose price is derived from the underlying assets The Derivative Market can be classified as Exchange Traded Derivatives Market and Over the Counter Derivative Market.

Market Participants ► Banks ► Commercial companies ► Central banks ► Hedge funds as speculators ► Investment management firms ► Retail foreign exchange brokers ► Other

Market Participants 1. Banks: 1. Banks: The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily 2. Commercial companies: 2. Commercial companies: They often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates They often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates

Market Participants 3. Central banks: 3. Central banks: National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. 4. Hedge funds as speculators: About 70% to 90% of the foreign exchange transactions are speculative. the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. About 70% to 90% of the foreign exchange transactions are speculative. the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency.

Market Participants 5. Investment management firms: These use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases. These use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases. 6. Retail foreign exchange brokers: Retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. Retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had.

Market Participants 7. Other: Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments.

Sources: ► WEI, S. - KIM, J.: The Big players in the foreing exchange market. Cambridge : National Bureau of economy, s. ► KRUGMAN, P. - OBSTFELD, M.: International Economics - theory and policy. Boston : Library of Congress Cataloging-in-Publication Data, s ► CHRISTOFFERSEN, P. - DIEBOLD, F.: Financial Asset Returns, Direction-of- Change Forecasting, and Volatility Dynamics. University of Pennsylvania : National Bureau of Economy in Pennsylvania, s. ► ► ►

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