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Foreign Exchange Markets and Forward Exchange Rates
Finance & Accounting
Pages 11 (2761 words)
Name Institution Course Instructor Date Foreign Exchange Market and Forward Exchange Rate Foreign exchange markets entail buying, borrowing, selling, and exchanging of currencies. The participants in this market comprise of banks, investment management firms, and the commercial companies.
Most of the transactions in this market occur over the counter. This implies that the participants in this market do not have a meeting place as it happens in stock exchange. The traders have offices in big commercial banks located all over the globe. Telephones, telexes, and other electronic means facilitate communication among the traders (Madura, 2008: 448). Forward exchange involves transacting using the expected future exchange rate with no immediate payments. The forward exchange rate refers to the rate in foreign exchange that is contracted at present time for exchange of currencies in future. The forward exchange is a precautionary measure to shield the traders from potential risks that may arise in the foreign exchange markets. Most speculators use the forward exchange because they anticipate changes in currency trading. Forward rates forecast the future of foreign exchange market. The rate gives rough information on the expectations of the current exchange rates in future. Currency can strengthen or depreciate. This is subject to market forces. Selling at premium characterises the anticipation of appreciation of currencies. Conversely, selling at discount is an indication of expected weakening of currencies. Spot exchange rate on the other hand refers to the current exchange rate in the foreign exchange market. ...
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