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Foreign Exchange Market and Forward Exchange Rate - Essay Example

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Author : wiegandantonina
Finance & Accounting
Pages 9 (2259 words)


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. …

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Foreign Exchange Market and Forward Exchange Rate

Foreign markets handle large transactions instantaneously at a cheap transaction cost. Rational speculative bubbles cause the exchange rates to differ from its fundamental valuation. Foreign Exchange Markets readjust to cushion the market from the departure of technical efficiency. These departures may be from panicking traders, noise traders, herding instinct, and bandwagon effects. Other factors that may lead to misalignments in the Exchange markets include traders that are caught in liquidity squeeze in other financial markets. They bring volatility to the Exchange Markets. Some forecasters strongly believe that foreign exchange markets are efficient. Similarly, they argue that forward exchange rates are unbiased predictors of future spot rates .To establish validity of efficiency in foreign exchange markets, this paper will explore the international finance theories. It will support the claims through use of appropriate examples. ...
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