Currency Exchange Market Essay
Money plays a vital and crucial role in the development of an individual, a nation, as well as, the whole globe. In this regard, banks, governments, and multinational corporations have created the largest financial market of the world, which has been referred as the currency exchange market. In this regard, different individual companies or governments are involved for the trading of different currencies with another. Some of the studies have found that approximately three trillion dollars is the amount of daily trade in the current currency exchange market of the world.
Thus, it can be seen that an enormous volume is traded everyday in this market, which affects the lives of millions of people every day, as different countries participate in this exchange market, which constitutes of thousands of traders from different parts of the world. In addition, traders do not get a high rate of profit in the market, and the market can be taken as a perfect competition market. If we go into the past, Chicago Mercantile Exchange was the first one to introduce the currency exchange market to the globe, which was based on the future contracts of different companies.
Currently, approximately 2. 7 trillion dollars is average turnover
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In the result, the role of an important asset class has been played by the currency exchange market. One of the other reasons of its growth is the increment in the fund management assets, which ahs been followed by the internet that has facilitated the streaming transactions with thousands of traders at the same time. The United Kingdom has the largest trading centre in the globe, which shared more than thirty percent of the trading volume in the month of June 2007. (Agenor, 2007)
Specifically, more than seventy percent of the trading is done by the large international banks that are considered the most active traders in the currency exchange market. Different levels of access are provided to the traders by the market in which, the highest level of access is mostly acquired by the investment banks, and they get different prices that the outside players that are not provided with these prices. In other words, the amount of volume that is traded results in the acquiring of different levels in the market.
In this regard, more than fifty percent of all the transactions can be attributed to the top investment banks of the globe, whereas, the top levels of access are acquired by small investment banks, hedge funds, forex market creators, and multinational companies from different parts of the world. Central, commercial, and investment banks have generally dominated the currency exchange market as compared with the other traders in the market.
However, different small and large traders can participate in the currency exchange market due to the globalization that has facilitated effectively. In this regard, money brokers, money managers, and private speculators are some of the members of current currency exchange market. Banks usually take part in the transactions of billions of dollars, which plays a vital role in their own growth. In terms of timing, the market opens on Sunday and closes on Friday between which, it does not stop and can be considered a twenty-four hour market.
Australia is the first country that starts the trading due to its time zone, which is followed by Japan, the United Kingdom, the United States, and so on. Different factors play a vital role in creation of fluctuations in the currency exchange market, and the currency exchange market provides the opportunity to investors to respond to these fluctuations, which is quite different from the other financial markets around the world. (Agenor, 2007). Capital mobility and financial globalization are some of the areas that developed and advanced significantly during the 1990s.
Interestingly, the budding market economies expanded greatly during this period and the advancement was not limited to the industrialized and developed countries of the world. On the other hand, the abovementioned emerging market economies confronted financial and money related crises in their region due to the advancement. For instance, the Asian crisis of the year 1997 is regarded as one of the most famous crises of all the time that affected the continent in an adverse manner. In this regard, a tremendous instability in the international capital flows resulted in the characterization of the Asian crisis.
In specific, Indonesia, the Philippines, Thailand, Malaysia, and Korea were greatly hit by the abovementioned crisis, which resulted in the losing of more than a hundred billion dollars in the year 1998 that affected these countries, which were quite stable with the receipt of around ninety-three billion dollars a year before the attack of the Asian crisis. It has been observed that approximate ten percent of the total gross domestic product of the five countries was the sum of reversal capital flows before the crisis.
Moreover, high share of temporary peripheral arrears in the external debt of the five countries was one of the major reasons of the sharp reversal in the banking and business flows of these countries. Furthermore, the crisis leveled significantly due to the different macroeconomic policies of these countries. In response to the massive capital inflow, the financial policies of most of these countries were confined for the avoidance of any excessive amplification in the demand at domestic level. Therefore, an increment was observed in the rates of demand at domestic level, which resulted in the further increment in the capital inflows.
In addition, exchange rate risk was assessed ineffectively, which was presented by the instability and fake constancy of the exchange rate system of these countries. Consequently, the external debts were prevaricated by the widespread relinquishment that was led by the above-mentioned wrong evaluation of the exchange rate risk in these countries. In the month of April 20007, the average turnover of the spot market on daily basis was totaled to thirty-eight billion dollars according to the triennial survey conducted by the Bank for International Settlements regarding the derivatives market.
An increase of six percent was observed in this survey, as compared to the previous survey that observed the total amount of thirty-six billion dollars as an average daily net turnover in these markets. In specific, the Hong Kong dollar and the United States dollar made the most-traded pair in the market, which was involved in more than forty percent of the daily forex turnover. Secondly, the Euro and the US dollar made the second most-traded pair in the currency exchange market accounted for more than ten percent of the transactions.
The forex market has also been employed by the finance and deposit-taking companies with treasury departments that followed the international banks and securities houses. In this regard, HSBC is the most active member of the currency exchange market, which plays a crucial role in the advancement of the region. Some of the other active participants of the forex market are the Bank of America, Citibank, some Japanese banks, and several European multinational companies around the world. In broad terms, the best rate in a given transaction is generally used by the corporate users in the forex market.
Several banks start their trading from 8 am; however, most of the companies perform trading during the office hours of 9 am to 5 pm. In addition, 24-hour trading rooms have been maintained by a number of banks around the world. Usually, it takes around two business days for the settlement of currency transactions. In the month of April 2006, the fixing of US dollar with the Hong Kong dollar was introduced by the Treasury Markets Association, which provided a standard to thousands of traders in the Asian countries.
In this regard, twenty designated banks are required to provide their rates that are averaged, in order to acquire a reference rate for the Hong Kong dollar and the US dollar. (Agenor, 1995) When the goods and services are acquired by the foreign clients, they wish to pay in their own currency to the commercial enterprises. In the result, the foreign currency market facilitates the trading of goods and services. However, private speculators trade in larger amounts, as compared to these commercial enterprises. In the result, the commercial enterprises have little or no impact on the rate of the foreign currency market.
The foreign currency exchange market constitutes of an important component, the national banks, which play the role of the controlling the money supply and inflation in the market. One of the best characteristics of the national banks is their reserves that can be used anytime to stabilize the market, as it has been observed that rumors and assumptions often destabilize the market, which affects millions of traders around the globe. In most of the cases, budgetary goals have not been achieved by the central banks due to their inability to stabilize the market in real situations.
The customers usually have large accounts in the investment management firms. In the result, these large amounts are utilized for the facilitation of transactions in the currency exchange market. The foreign equities are bought and sold by the buying and selling of foreign currencies by these firms. Therefore, the profit maximization is not the objective of most of the investment management firms, but the buying of foreign equities. However, some of the firms limit the risk by utilizing the deposited currency of the clients for the generation of profits in the market transactions.
One of the examples is the hedge funds that have the ability to speculate and destabilize the market by the trading of their equity worth of billions of dollars. Favored economic factors can result in the overwhelming of any currency by the hedge funds, as compared with the central banks. Another speculative role is played by the retail forex brokers that can also contemplate the trading by their equities. (Agenor, 1995) As earlier mentioned in the paper, the currency exchange market does not have a central market unlike other financial markets in the globe.
This market does not have any border regulations and thus, it can be referred as a perfect competition market. This twenty-four hour market confronts various fluctuations due to different financial flows and future reports related to these monetary flows in different parts of the world. Nowadays, the most heavily traded paired-currencies are the Euro with the US dollar. The pairs of US dollar and the Japanese Yen, and the UK Sterling with the US dollar are some of the other most heavily traded currencies parts in the currency exchange market.
The majority of the market share has been retained by the US dollar, which is not affected usually by the rise in the rate of Euro in the currency exchange market. The United Kingdom, the United States, and several Asian countries have some of the leading currency exchange markets of the world. As earlier mentioned in the paper, the European and American markets usually follow the Asian trade markets that start first due to their earlier time zone. A number of factors are responsible for the fluctuations in the exchange rates of currencies in the currency exchange market.
In this regard, supply and demand forces play the crucial role in the provision of these factors that change the price of one currency resulting in the change of another. In addition, the exchange rates of currencies are also affected by the political activities in different parts of the world. Thus, the currency exchange market is highly vulnerable to the supply and demand forces that account for most of the price fluctuations in the market. (Algahtani, 2002) Moreover, different governments form different economic policies for their coming financial year, which plays a crucial role in the currency exchange market.
It has been observed that the market often confronts fluctuations due the announcement of new monetary policies by the different governments. In specific, budget deficits of governments affect the currency exchange market in a very unconstructive manner. On the other hand, reduction in the budget deficits results in the constructive attitude of the market. The currency exchange market is also affected by the excess of goods, as well as, shortfall of goods and services in different countries. Thus, a number of factors affect the activities of currency exchange market in different parts of the world.
In addition, a high inflation often results in the reduction of currency value of a country, and the market often fluctuates due to the factor of inflation. However, the prices are increased in the market due to the expectations of increase in the interest rate due to the inflation in different countries. Furthermore, different economists provide economic reports related to the GDP and economic growth of a country, which plays a crucial and deciding role in the currency exchange rate of a country.
Economy, as well as, currency exchange rate can be damaged and affected by the instability in the political conditions of a country. Moreover, the value of a currency can also be reduced due to this instability. Sometimes, the neighboring countries also get negative impact due to the political turmoil in a single country. In addition, perceptions of the market are also responsible for the fluctuations in the currency exchange market. On the other hand, traders can acquire a safe zone during the international events that can have a positive impact on the currency exchange markets.
As earlier discussed in the paper, future prospects and activities of governments also have a great impact on the fluctuations in a currency exchange market. (Algahtani, 2002) The currency exchange market has been developed significantly due to the facilitation of the electronic trading means. A currency exchange market consists of various financial instruments. A direct exchange between two currencies is represented by a spot transaction, which involves cash. On the other hand, a future date is settled for a forward transaction that is another important financial instrument of a currency exchange market.
Contract sizes and maturity dates can be observed in the future financial instruments of the market. The US Dollar is the only standard that is used for the tracking of price movement of different currencies by the foreign exchange funds. The amount of units of a country that can be used to exchange with currency of another country can be referred as the foreign exchange rate. (Algahtani, 2002) As earlier mentioned in the paper, the foreign currency exchange market is also available with a variety of financial instruments.
Different roles are played by different financial instruments on long term and short term bases. In this regard, the nature of a company is responsible for the acquiring of suitable financial instrument for the organization. Different options and opportunities are available to different traders, such as multinational companies, private speculators, banks, retail forex traders, etc. Currency exchange markets consist of different markets, such as international capital markets, international foreign exchange markets, etc.
From the point of a business transaction, a transaction in the domestic market and a transaction in the international market share a significant difference between each other. A domestic transaction involves the utilization of a single currency; whereas, two or more than two currencies are usually involved in a foreign transaction, which is a fundamental difference in these transactions. The largest market of the world is the foreign exchange market that involves the selling and buying of different currencies against each other.
A number of experts refer this market as a forex market, which has been described as over-the-counter market. A forex market is very different from a stock market, as there is no single market or organized market like the stock markets. On the other hand, most of the multinational banks have forex market dealing rooms where, the traders can sit and discuss and trade currencies in the market. Most of these dealing rooms are now equipped with electronic technologies that allow the traders to make transactions through internet, which has played a vital role in the development of the forex market.
(Alami, 2001) Occasionally, profit making is done by performing of different transactions by foreign exchange investors and dealers. In this regard, arbitrage is one of the types of forex market activities that are meant for the profit only. In such activity, a market is considered for the buying of a currency, and another market is considered for the selling of same currency immediately that may provide an immediate profit from the transaction.
Therefore, activity that considers different quoted rates resulting in a difference in various markets that may provide profit without any risk can be referred as arbitrage. As earlier discussed in the paper, more than three trillion dollars are traded in the currency exchange market on daily basis. In this regard, different individual companies or governments are involved for the trading of different currencies with another. Some of the studies have found that approximately three trillion dollars is the amount of daily trade in the current currency exchange market of the world.
Thus, it can be seen that an enormous volume is traded everyday in this market, which affects the lives of millions of people every day, as different countries participate in this exchange market, which constitutes of thousands of traders from different parts of the world. A number of factors are responsible for the fluctuations in the exchange rates of currencies in the currency exchange market. In this regard, supply and demand forces play the crucial role in the provision of these factors that change the price of one currency resulting in the change of another.
In addition, the exchange rates of currencies are also affected by the political activities in different parts of the world. Thus, the currency exchange market is highly vulnerable to the supply and demand forces that account for most of the price fluctuations in the market. References Agenor, Pierre-Richard. 2007. “Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange: A Formal Framework. ” IMF Staff Papers, v. 37, no. 3, September: 560-92. Agenor, Pierre-Richard. 1997. “A Monetary Model of the Parallel Market for Foreign Exchange.
” Journal of Economic Studies, v. 18, no. 4: 4-18. Agenor, Pierre-Richard. 1995. “Monetary Shocks and Exchange Rate Dynamics with Informal Currency Markets. ” International Review of Economics and Finance, v. 4, no. 3: 211-26. Alami, Tarik H. 2001. “Currency Substitution Versus Dollarization: A Portfolio Balance Model. ” Journal of Policy Modeling, v. 23, no. 4, May: 473-479. Algahthani, Ibrahim M. 2002. “Currency Substitution, Gold Price and the Demand for Money in a Developing Economy: The Case of Kuwait. ” Middle East Business and Economic Review, v. 4, no. 2, July: 1-5. (Kuwait)