Foreign Exchange Market - Assignment Example

April 5, Foreign_Exchange_Market Spot_Market The foreign exchange spot market represents the cash market (Weithers, 2011). The spot transaction can be defined as a 2-day delivery transaction. The market is characterized by the immediate delivery and payment of the acquired items. Two parties agree to exchange currencies at an agreed spot price for delivery at a spot date. For example, the seller agrees to convert the customer’s $100 to the London pound. The American tourist agrees to convert his $100 to the London pound at the April 5, 2015 spot foreign_currency conversion rate, $ U.S. 1.00 = £ 0.67.

The parties agree to convert the U.S. currency to the British Pound today (spot transaction date), April 5, 2015 (The Money Converter, 2015).Foreign_Currency Brokers & DealersThere is a difference between foreign_currency dealers and brokers. The foreign exchange dealer is a person or entity (especially a bank) that buys and sells foreign_currency. People can spot them in supermarkets and grocery stores. The dealer makes a profit by selling the purchased foreign_currency to a buyer of the foreign_currency at a higher price (Shoub, 2013).

On the other hand, the foreign exchange broker functions within the currency market. The currency market transactions work just like the stock exchange each foreign_currency broker member of the currency market buy and sell foreign_currency among each other. The broker earns a commission for each foreign_currency transaction. The transaction may be classified as either a buy transaction or a sell transaction.Foreign_Currency Exchange Rate The terms direct quote represents the number of United States dollars needed to acquire one quantity of the foreign_currency (The Money Converter, 2015).

For example, a Los Angeles person can convert one United States dollar to British pound at the current foreign_currency conversion rate. The current April 5, 2015 foreign_currency conversion rate is U.S. $ 1 = £ 0.67. If the same person converts his $100 to British Pound, the person will turn over to the foreign_currency trader U.S. $ 100 and receive in return £ 67. Further, the term indirect quote represents the number of foreign_currency needed to acquire one United States dollar (The Money Converter, 2015).

Using the same conversion rate above, a London based buyer wants to purchase a chosen New York store’s furniture. The furniture store only accepts United States currency. The furniture price is U.S. $ 100. Using the same conversion table above, the London buyer must convert his £ 67 to the required United States $ 100. After the conversion, the London buyer can pay the New York store the $100 price of the chosen furniture piece. Furthermore, the term cross rate refers to the currency exchange rate of a third currency.

For example, an Argentine tourist visiting London wants to convert his 1,000 Argentine pesos to the Euro dollar currency. However, the foreign_currency trader located in London does not have the capacity to directly convert the Argentine peso to the Euro dollar currency. Both agree to use the U.S. dollar currency as third currency basis. The 1,000 Argentine Peso is multiplied by the ($ 1 = 0.11417 Argentine Peso) conversion rate generates U.S. $114.17. Next, the U.S. $114.17 is converted to euro dollar. U.S. $114.17 x (Euro $ 1 =U.S. $ 0.91240) equates to only € 104.

17 (The Money Converter, 2015). References:CNN_Money. (2015, April 5). CNN Money. Retrieved April 5, 2015, from http://money.cnn.com/data/commodities/Shoub, G. (2013). International Guide to Foreign_currency Management. New York: Routledge Press.The Money Converter. (2015, April 5). Retrieved April 5, 2015, from http://themoneyconverter.com/USD/GBP.aspxWeithers, T. (2011). Foreign Exchange. New York: J. Wiley & Sons Press.