International Finance Introduction Essay

Chapter 7 Foreign exchange market
The purpose of the foreign exchange market is to permit transfers of purchasing power denominated in one currency to another.Most currency transactions are channeled trough the worldwide interbank market,the wholesale market in which major banks trade with one another.This market ,which account for about 95% of foreign exchange transactions,is normally referred to as the foreign exchange market.IT is dominated by 20 major banks.In the spot market(account for 30%),currencies are trade for immediate delivery,which is actually within two business days after the transaction has been concluded.In the forward market(12%),contracts are made to buy or sell currencies for future delivery.The remaining 55% of the market consist of swap trasactions.The foreign exchange market is an electronically linked network of banks ,foreign exchange brokers,and dealers whose function is to bring together buyers and sellers of foreign exchange .The SWIFT(Society for Worldwide Interbank Financial Telecommunications) net work connects more than 7000 banks and broker-dealers in 192 countries and processes more than five million transactions a day,representing about $5 trillion in payment.To use SWIFT,the corporate clint must deal with domestic banks that are subscribers and with foreign banks that are highly automated
Trade in goods and services accounts for less than 5% of foreign exchange trading.More than 95% of foreign exchange trading relates to cross-border purchase and sales of assets,that is,to international capital flows.
Currency trading takes place 24 hours a day,but volume varies depending on the number of potential counterparties available.
The major participants int eh foreign exchange market are the large commercial banks,foreign exchange brokers in the interbank market,commercial customers,primarily multinational corporations,central banks..Only the head offices or regional office of the major commercial and investment banks are actually market makers.--that is they actively deal in foreign exchange for their own accounts.
The major participants in the forward market can be categorized as arbitrageurs,traders,hedgers,and speculators.Arbitrageurs seek to earn risk free profits by taking advantage of differences in interest rates among countries.They use forward contracts to eliminate the exchange risk involoved in transferring their funds from one nation to another.Traders use forward contracts to eliminate or cover the risk of loss on export or import orders that are dominated in foreign currencies.Hedgers ,mostly multinational firms,engage in forward contracts to protect the home currency value of various foreign currency-denominated assets and liabilities on

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