Chapter 9: FOREX MARKET

KEY POINTS:

 Countries and firms transact business internationally,

because of this we have to be concerned with exchange
rates. Exchange rates means the relationship or values
of different currencies.
 Foreign exchange market primarily exists to cater the
currency needs of exporters, importers and even
travelers.

1. What is Foreign exchange market?

- A place where you can buy, sell, exchange and speculate on
currencies. Through over the counter pwede tayo mag exchange
ng ating currencies. Usually banks ang nagpafacilitate ng
transactions, pero sa ngayon merun din sa mga malls na money
changer kung san pwede din naten palitan ang currency na hawak
naten.
2. Who needs to know Forex Market?
-Exporters will have to need to convert the payments received
from abroad buyer into domestic currency. The exporter is
concerned with the income. The importer will have to convert the
domestic currency into US dollars to purchase goods abroad.
Importer is concerned with the cost. Investors may speculate the
increase/decrease of different currencies to gain profit. In this
way, kung magaling ang monitoring neo as investors, madali kayo
mag gain sa forex.

3. Why exchange rates important?

Several reasons in the importance of exchange rates. It involves
mga domestic goods at foreign goods naten. Thus, kung bibili tayo
ng imported perfume sa US, need naten determine palitan ng dollar
sa pesos. Meaning, how much peso do we need to have one dollar,
nakasalalay dito ung pg determine naten kung mahal ba or mura
ang goods na iimport naten. Sa pamamagitan ng exchange rates
 magagawa naten icompare and prices ng bawat goods or even
services quoted ng ibat ibang bansa.

4. Factors influencing exchange rates.

a. Inflation. The devaluation of our currency. So higher
inflation rates have negative effects on the value of a
currency. The currency becomes weaker compared to other
currencies which means it buys less of other currencies Kapag
mataas ang inflation rate naten meaning mababa ang value ng
pera naten, so kung need naten ng dollar, mas madami peso ang
kakailanganin naten. As the currency drops, the cost to their
foreign consumers falls and they are likely to buy more. This
in turn translates to higher profits, production, employment,
and output.

b. Interest rates. May kinalaman din ito sa bonds issuance or

other debt instruments. If mas mataas ang offer na interest
rates ng mga borrower, mas mdami ang lender na mgppautang. Pag
dumating na un bayaran at foreigner ang babayaran mo, mas
madami currency ka need. The higher interest rates that can be
earned tend to attract foreign investment, increasing the
demand for and value of the home country's currency.
Conversely, lower interest rates tend to be unattractive for
foreign investment and decrease the currency's relative value.

c. Balance of payment. A country’s balance of trade refers to the

difference of how much a country is importing versus
exporting. If a country exports more than it imports, there is
a high demand for its goods, and thus, for its currency. Kung
mdami tayo naeexport ngkakaron tayo ng net surplus, as
nagiging in demand ang currency naten kaya tumataas value nea.

d. Government intervention. May mga instances na un government

pag nakikita na nila bumabagsak un economy nila or trying to
 protect un status ng knilang currency, ngseset na sila ng
fixed price nito.

e. Other factors. The more magulo an isang bansa the more hindi
nakakapag entertain ng investors, pero hindi naman natatapos
un needs nea to import, so in this case bumababa ang value ng
currency mo.
5. How FOREX is traded?
Over the counter ang trading usually banks ang intermediary dito.
Unlike stock market merun sila PSE. If our country needs dollars
we transact sa mga banks abroad. There is no central marketplace
for foreign exchange. Currency trading is conducted
electronically over-the-counter (OTC), which means that all
transactions occur via computer networks between traders around the
world, rather than on one centralized exchange. The market is open
24 hours a day, five and a half days a week, and currencies are traded
worldwide in the major financial centers of London, New York, Tokyo,
Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney—across
almost every time zone. This means that when the trading day in the
U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As
such, the forex market can be extremely active any time of the
day, with price quotes changing constantly.

6. Interaction in foreign currency markets?

a. Exchange rate determination. Meaning affected ang value ng
currency sa basic economics rule naten, un ung demand and
supply. The economics of supply and demand dictate that when
demand is high, prices rise and the currency appreciates in
value. In contrast, if a country imports more than it exports,
there is relatively less demand for its currency, so prices
should decline. In the case of currency, it depreciates or
loses value.

b. Fixed exchange rate. My mga bansa na fixed ang exchange rate

to protect their currency. Ang costs of Fixed Exchange rates,
 pwede magkaron ng wrong Value. If you join an exchange rate at
the wrong value, it can cause certain problems. If the value
of the exchange rate is too high, then exports will become
uncompetitive; this can lead to lower demand and lower growth.

c. Managed float. Ito ung mga instances na nagkakaron ng

government intervention. If nakikita na ng government ang
pagbagsak ng value ng currency nila, imamanage na nila ito,
hanap sila way to make adjustment. Managed floating rate is
also called dirty floating exchange rates. Due to the reason
that government interferes in it and those prices which were
to be settled by the demand and supply rule have been
intervened by the central bank.

7. Purchasing power parity

It is a theory used to determine kung san mas mataas ang price ng
isang product. This is used to determine the increase/decrease of
currency. Thus, kung tataas ang price ng 10% sa dollars meaning
tumaas ang value ng dollar ng 10%, kaya dpat itaas din ang value
ng Peso sa 10% para equal ulet.

8. SPOT RATE vs FORWARD RATE

The spot rate is one exchange rate—the rate for an immediate
exchange actually, it's not quite identical, different markets
have different conventions for when “immediate” exchanges take
place. There are also forward exchange rates for exchanges that
happen at future times. Same as derivatives.

9. DIRECT VS INDIRECT QUOTE

Direct quotation is when the one unit of foreign currency is
expressed in terms of domestic currency. Similarly, the indirect
quotation is when one unit of domestic currency us expressed in
terms of foreign currency.
Example: Direct quotation: 1 EUR = 1.14 USD
 Indirect quotation: 1 USD = 0.88 EUR
10. CROSS RATES
Cross rates are the relation of two currencies against each
other, based on the rate of each of them against a third currency.
For example, the Bank of England sells or purchases euros for yen.
To calculate the cross rate of the EURJPY, the bank will use the
dollar quotes for the two pairs, EURUSD and USDJPY. As such, the
Ask and Bid quotes of EURJPY will be calculated as follows: Bid
EURJPY = Bid EURUSD x Bid USDJAPY; Ask EURJPY = Ask EURUSD x Ask
USDJPY

11. ARBITRAGE
Forex arbitrage is a trading strategy that seeks to exploit price
discrepancy. It means you can buy in one market, while
simultaneously selling an equivalent size in another interrelated
market, to take advantage of price differences between the two.

12. FACTORS THAT AFFECT EXCHANGE RATES IN THE LONG RUN

(additional infos)
 The exchange rate is determined in the long run by prices,
which are determined by the relative supply of money across
countries and the relative real demand of money across
countries. causing a proportional depreciation in the
domestic currency.

13. FACTORS THAT AFFECT EXCHANGE RATES IN SHORT RUN. (Additional

infos)
 Among the crucial short-term factors are interest rates,
economic growth, trade flows, inflation, commodity-based
currency impact, political or geopolitical conflicts and
natural calamities in a country

14. FOREIGN EXCHNAGE RISK

 Foreign Exchange Risk refers to the risk of an unfavorable change
in the settlement value of a transaction entered in a currency other
than the base currency . Foreign exchange risk is the threat of
financial loss as a result of changes to foreign exchange rates.
Transaction exposure, where payments and receipts are directly
affected by currency exchange rates. Economic exposure, where market
value is affected by unexpected currency rate fluctuation.

QUESTIONS. KINDLY CHOOSE AT LEAST TWO (2)QUESTIONS AND ANSWER.

1. Explain how imports and exports tend to influence the value of

currency.
2. Illustrate by giving an example how will you gain in forex using
arbitrage.
3. Create strategies on how to deal with the factors that affect the
exchange rates both in long and short run.
4. How does purchasing power parity works?
5. How will you take the advantage of spot and forward transaction?