| The foreign exchange market is a platform where | | | | found on the internet or in the financial pages of |
| the currency of one country could be converted in | | | | newspapers. The dynamics between the demand and |
| to that of another country. The exchange rate | | | | the supply of a specific currency compared to that |
| determines the ratio at which one currency is | | | | of other currencies, determines the value of a |
| converted into another currency. | | | | currency. |
| The foreign exchange market is one of the most | | | | Forward Exchange Rates |
| dynamic forces in international business and enables | | | | A forward exchange rate is a fixed rate for some |
| investors to undertake foreign investments | | | | time in the future, but traded upon in the present. |
| worldwide. Without it, international trade and | | | | For most of the prominent currencies, forward |
| investment on the magnitude we experience today | | | | exchange rates are quoted for 30 days, 90 days and |
| would not be possible. | | | | 180 into the future. To illustrate this explanation, the |
| Many international traders use the foreign exchange | | | | following example is used: |
| market to invest for short terms in money markets. | | | | On the 26 June 2008, the 90 day forward exchange |
| Currency speculation is the short-term exchange of | | | | rate for converting Pounds into Indian Rupees (INR) |
| funds from one currency to another in anticipation of | | | | is £1 = INR 110. The importer enters into a |
| movements in exchange rates. The rate of return it | | | | 90-day forward exchange contract with a foreign |
| earns on this investment depends not only on the | | | | trader at this rate and is guaranteed to be |
| specific country's interest rate, but also the changes | | | | unaffected should the Rupees/Pound exchange rate |
| in the value of the concerned currencies in the | | | | fluctuate. |
| intervening period. | | | | Currency Swaps |
| Operating in the foreign exchange market is an | | | | A currency swap occurs when you buy and sell a |
| ongoing challenge for the Entrepreneur and involves | | | | certain amount of currency for two different value |
| some risk. Foreign exchange risk arises from changes | | | | dates simultaneously. The most frequent kind of |
| in exchange rates. Such fluctuations in the currency | | | | currency swap, is spot against forward. To illustrate |
| market can alter the Entrepreneur's expected value | | | | this explanation, the following example is used: |
| of international transactions, simply because it can | | | | On the 26 June 2008, the Spot exchange rate is |
| imply a change in the export opportunities available | | | | £1 = INR 120 and the 90 day forward |
| and also have an impact on imports. However, it is | | | | exchange rate is £1 = INR 110. The |
| possible to eliminate some of the risks involved by | | | | international entrepreneur sells £1 million to its |
| using the foreign exchange market. | | | | bank in return for INR 120 million, and at the same |
| Spot Exchange Rates | | | | time enters into a 90 forward exchange deal with its |
| The spot exchange rate is the same as the | | | | bank for converting INR120 million into pounds. This |
| exchange rate for that particular day. Spot | | | | implies that the entrepreneur will receive £1.09 |
| exchanges are updated on a daily basis and can be | | | | million (INR120 million/110 = £1.09 million). |