The Currency Market Trends - Essay Example

Individual Project 3 The Currency Market could be defined as a place an exchange place where money denominated in one currency is bought and sold with money denominated in another currency. These forms of market are put into existence for a particular reason. Other than helping traders, the market ensures that there is smooth exchange of currency and that the traders get the right share even as the market trends globally change. Additionally, changing market trends are reflected and the needed adjustments made so that no violations are made to traders. There are two types of Currency Markets; Spot Market is basically a market where immediate transactions take place. Once the transactions are made, they are recorded by the 2nd business day. The main participants by market include brokers commercial banks customers of commercial and central banks Sources of spot quotations come from all major newspapers and major currencies that use different quotes. The spot market has varying prices depending on the number of days from say 30-day through 60-day to 180-day. The spot market recognizes the customers even when making quotations. The costs of Transactions Costs will depend on the market trends as well as a bid-spread basis. This helps us to formulate the spot as well as forward exchange rates. The bid represents the price or cost at which the bidder (mostly bank) is willing to buy while the ask equals to the price at which the bidder will sell the currency bought. The other type of currency market is the forward Market. In this form of currency market, transactions take place only at a specified future date or time. It is characterized by ; arbitrageurs traders hedgers speculators The forward market forms’ main aim is to among other things reduce the cost of trading and provide liquidity. It also serves to threaten people mainly traders of oligopoly of information. This form of currency market is more popular that the former as it boasts of a large market size. For instance, the market a trend in a research done annually in 1995 and that on a daily basis in some major cities is as below. 1995: $1.2 trillion dailyMarket Centers (1995) London =$464 billion New York= $244 billion Tokyo = $161 billion In order to effectively handle the assignment, I have broken it down as below so that it is easier to follow through. To calculate the spot and 12-month forward exchange rates we will first to calculate the PS for both German and China currencies. USA German Revenues forecast =$500 million operations=€100 million Operations=$300million ROS= 12% ROS= 10%= net income China Operations=650 million yuan ROS= 8% This can be done by following a formula given below. 1. 10% of $300=$30 PS= {ask-bid}/ask*100 PS= ({$300-$30}/$300)*100 = $90miliion 2. 12% of €100= €12 PS= {ask-bid}/ask*100 PS= ({€100-€12}/€100)*100 =€88million 3. 8% 650 million yuan= 52 million yuan PS= {ask-bid}/ask*100 = {650-52/650}*100 =92 million yuan The forward exchange rate for German will be 90/88 or $1.0227. Whereas, the forward exchange rate for China will be 90/92 or $0.978. Repatriation can be termed as the process of changing a foreign currency into that of an owner’s country. This is usually dependent on the exchange rate between the two currencies caused by disparities between the economies of scale. A good example would be a South African converting American pound back into South African rand so that they are able to use it. While exchanging the money, the trader will be exposed to something called foreign exchange risk. This is when the trader decides to engage in a foreign exchange swap. In a spot transaction, the condition is that of a bid-ask condition. Therefore, depending on how much the bidder (bank) is willing to offer and how much it will sell then the trader will decide whether to be involved in the transaction. So for instance if the bank is in need of the currency, the trader might actually make a profit out of it(Sellon, 1998, 147-177). In the outright forward repatriation, an investor is allowed to make a currency on a specific date or within a certain range of dates that is of convenience to them. It can be defined as a locked-in exchange rate and delivery date. It functions in a similar way to standard forward contracts. It is mostly used for big organizations and would be more suitable here. This way the organization is in a position to make a few transactions and wait on the say changing global trends to be favorable before they can make another transaction. It is important that every state a well-organizedcash repatriation strategy in order for investors to thrive. The Chinese government is one that has such a strategy due to its vast number of investors. Due to its thorough foreign currency control that many U.S multinationals consider not only making transactions with Chinese customers but also seeking professional expertise on how they would better their own. The strict foreign currency control translates into a difficulty to many companies that try to seek flexible ways to repatriate the cash to their parent companies. Formulating the right business model is one strategies that I would advise a company to adopt so as to become successful. This model’s main aim should be to put the revenue with the ideal entities. Having intercompany service fees is a policy that depends on foreign-like parties for support. This strategy comes in handy as it helps the party to chip in support whenever there are financial strains. The management is thus able to budget for money to be used as well as have one ready in the event of emergency. Having a lower percentage on royalties, which is basically an amount of money that is paid so as to cater for intellectual property such as trademarks, copyrights and patents is also a strategy I would recommend. Finally it is important that a company ventures into loans within the company. Though difficult, this ensures that the circulation of money remains within the company.Because each of these strategies has certain limitations, experienced planners often employ a combination to achieve cash-flow efficiency, generate tax savings, and meet operational goals. Work cited Bonser-Neal, Catherine, V. Vance Roley, and Gordon H. Sellon, Jr. "Monetary Policy Actions, Intervention, and Exchange Rates: A Reexamination of the Empirical Relationships Using Federal Funds Rate Target Data*." The Journal of Business 71.2 (1998): 147-177. Read More