Question

In your own words of 350+, Define what a foreign exchange is and who are the major players in the foreign- exchange market. Summarize the major characteristics of the foreign exchange market. Finally compare and contrast spot, forward, options, and futures markets. Remember. No plagiarism!!

Answer 1

FOREIGN EXCHANGE MARKET

Foreign exchange (or Forex) is the exchange of one foreign currency to another and when buyers and sellers are ready to buy and sell the foreign currencies of different nations at a place (or market) that is called as the foreign exchange market.

MAJOR PLAYERS OF THE FOREIGN MARKET

The major players structure are in foreign exchange market given below

Central Bank Brokers Commercial Banks Importers/Exporters Investors Tourists

Central bank

The central bank of any country is considered as the lender of the last resort and play the major role in exchange market. To abstain from fluctuations, bank has the greatest power to regulate the foreign exchange market and control through direct intervention, if needed. These steps are taken to safe currency value in market from becoming overvalued or undervalued.

Brokers

On basis of commission brokers deal with the buyers and sellers. So, they are played crucial role to the exchange market. They are worked as the mediator role between central and commercial banks.

Commercial banks

These banks play an important role in foreign exchange market as they buy currencies from brokers and sell to the buyers. These banks also determine the supply and demand of foreign exchange

Investors

How much investment has been made or plans to make in future by a nation is also decide the rates in foreign exchange market.

Importers/exporters

The involvement of exporters and importers of different countries plays an important role to evaluate the exchange rates for foreign currencies. If this process is done in large numbers the nation’s currency is called as strong currency.

Tourists

The exchange rate of foreign currency also depends on the tourism sector of a nation. Because the foreigners before entering a nation, they exchange their currency with their domestic currency. The larger the tourists indicate the huge foreign reserves in domestic financial institution. So, this is one of the major player in foreign exchange market.

Major characteristics of the FEM

Lesser cost OF TRANSACTION

ENCOURAGE MORE INVESTMENT WITH FOREIGN NATIONS.

MARKET TRANSPENCY

highly paid market

dynamic market

more liquidity

fast exceution

Basis for comparison	Spot market	Forward market	Option market	Future market
Purpose	For making immediate transaction (delivery), the agreement done on spot date or place. Also called as the spot price.	A forward rate is used to quote a financial transaction that takes place on a future date and is the settlement price of a forward contract.	At a pre-determined price(strike price) , the market gives the right to one buyers or seller to purchase (or sell) the given assets to another on future date	A delay agreement for buying and selling of a financial instrument at a pre-determined prices at somewhere in future specified date
Margin Requirements	No need	Few margins	No need	A minimum amount of cash is required
Flexibility	Lesser	Yes	Larger	limited
Risks	No	Eliminates the uncertainty	limited	Unlimited (high)
Size	Modest fee	More expensive	Less expensive	Expensive
Execution of contract	On due date	Early, on due date ,Later than due date	Before the expiration of agreed date	On the agreed date