Starting the Learning of Foreign Exchange Market - Shall be able to Forex Trading

Starting the Learning of Foreign Exchange Market - Shall be able to Forex Trading



          Forex, Foreign Exchange, (FX), Currencies Market 


Forex, Foreign Exchange Market

After starting the Learning of Foreign Exchange Market we shall be able to Understand the Following Major Concept



 Learning Outcomes 


  • Understand - the concept of exchange rates 
  • Distinguish - between spot and forward exchange rates 
  • Outline - the factors affecting exchange rate determination 
  • Distinguish - between fixed and flexible exchange rate Systems
  • Know - about the participants in foreign exchange markets 
  • Calculate the exchange rate quotes


 A defining feature of the global economy in the last few decades has been increased flows of international trade and investment what these activities require the use of foreign exchange such as Dollars Euros and Pound, this is because sellers in different countries want to be paid in their home currency or in a currency considered strong and universally acceptable.
 for example and in Pakistani exporter to the USA will earn dollars for his goods but will have to convert them into rupees for use in the domestic economy and an Pakistani importer purchasing goods from Germany may have to convert Pakitani rupees into Euros to pay his buyer this requires a foreign exchange market where foreign currencies are traded the foreign exchange market in any country is an essential component of the international monetary system the institutional framework within which the International payments are made national currencies are exchanged and cross currency exchange rates are determined cross-border transactions of trade and investment occur through an exchange of currencies between buyers and sellers a currency is a form of money and a unit of exchange foreign exchange is the money of a foreign country in the form of banknotes drafts and checks it is expressed as the foreign exchange rate which is the price of domestic currency in terms of a foreign currency, for example, PKR vs the US Dollar or the PKR vs the Euro in this module we shall discuss the concept of exchange rates the factors affecting exchange rate determination the fixed and the flexible exchange rate systems the parchments in foreign exchange markets we would also discuss the liberalize exchange rate management system in Pakistan with the help of visuals and animations.


Concept of The Foreign Exchange Market  

Concept of The Foreign Exchange Market
   Let's us begin by understanding the concept of foreign exchange market it is the market where currency of one country is traded for currency of another country it is an over-the-counter market which means that there is no physical market place where currencies are traded instead it is a network of large commercial or investment banks brokers and dealers spread across the globe connected through telephones faxes and computers.


Type of Foreign Exchange Market

   There are Two Segment of Forex Markets 
spot market and forward market spot market
   Spot Market, it is that segment of foreign exchange market where currencies are traded for imagery delivery the day on which delivery takes place is known as value date or settlement date the rate applicable to on the spot rates are known as spot exchange rates.
  
   Forward Market it is that segment of the foreign exchange market where currencies are traded not for immediate delivery but for delivery on any future date say after a 4 night 30 days 90 days and so on the rate governing such future transactions is known as forwarding exchange rate for most major currencies forward exchange rates are quoted for 30 days 90 days and 120 days and so on these rates can be at premium or discount compared to the spot exchange rate forward exchanges provide a mechanism for eliminating exchange rate risk that may arise in future due to adverse movements in the exchange rate.


Participants in the Foreign Exchange Market

participants in foreign exchange market
   There are three participants in foreign exchange market non-banking entities these include importers exporters investors and multinational corporations who participate in the market to settle their international transactions banking entities these include commercial banks and central bank of the country while commercial banks play the role of market maker and operate for-profit motive central bank plays the role of regulator in the market central bank aims to curb the excessive volatility in the exchange rates foreign exchange brokers they play the role of mediator in the market their role is to bring buyers and sellers together.

Concept of  The Exchange Rate

   Let's now try to understand the concept of exchange rate for a pair of currency exchange rate is the price of one currency quoted in terms of another currency it indicates the price at which one currency can be exchanged for another the two ways of quoting exchange rates are direct code and indirect coat a direct coat is the coat where exchange rate is expressed in terms of number of units of domestic currency per unit of foreign currency Rupees per Dollar for example 55 is the direct code for USD in Pakistan this code is read as rupees 55 per US dollar, in other words, one dollar is worth rupees 55 five indirect coat is the coat where exchange rate is expressed in terms of number of units of foreign currency per unit of domestic currency Dollar per Rupees for example 0.018 two is the indirect coat for USD in Pakistan this is to be read as dollar 0.018 to per rupee, in other words, one rupee is worth dollar 0.018.

    Foreign Exchange rate regime refers to set of policies agreements institutions mechanisms and rules for determination of exchange rate at a given point of time changes in exchange rate over time and factors inducing such changes the type of exchange rate regime adopted by the country determines the involvement of government in establishing and maintaining the exchange rate of its domestic currency against foreign currencies depending on the involvement of government or monetary authorities of a country in foreign exchange market exchange rate regimes are classified as fixed exchange rate system or flexible that is floating exchange rate system.

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