Sunday, 22 December 2019

Unit 13: International Finance and Foreign Exchange

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Unit 13: International Finance and Foreign Exchange


The foreign exchange market acts as the intermediary through which complex transactions between different currencies are completed.

Individuals and institutions, such as multinational corporations, pension funds, commercial banks, central banks, arbitragers, speculators, and foreign exchange brokers all participate in the market to varying degrees, with the large international banks being the most active.

The three major transactions in the foreign exchange market are the spot, forward and swap transactions.

Forward contracts, which are generally used by large international banks and MNCs, can be tailor-made for any contract size or currency, but they require execution of the transaction on the date of contract maturity.

Futures contracts differ from forward contracts by offering standardised, regulated contracts of smaller sizes, which can be easily liquidated.

Options are yet another form of currency contract, which, like futures contracts, are standardised and can be easily liquidated.

Fundamental forecasting examines macroeconomic variables, such as balance of payments, inflation rates, and unemployment trends to predict future exchange rates, while technical forecasting relies on historical exchange rate data to predict future currency exchange rates.

IMF Each member of the IMF undertakes a broad obligation to collaborate with the IMF and other members to ensure orderly exchange arrangements and to promote a system of stable exchange rates.

The Fund’s goal is “to promote international monetary cooperation, exchange stability to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.

  World Bank began operations in June 1946, with its purpose being to provide funds, policy guidance and technical assistance to facilitate economic development in its poorer member countries.

The Group comprises other organizations like IDA, MIGA and IFC.

IFC was established to help strengthen the private sector in developing counties, through the provision of long-term loans, equity investments, guarantees, standby financing, risk management and quasi equity instruments such as subordinated loans, preferred stock and income notes.

   International Business Notes   In OECD, The aims of the organisation are to promote policies designed to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy.

Foreign exchange: The system by which one currency is exchanged for another Forward market: It consists of transactions that require delivery of currency at an agreed upon future date Future market: Market where the parties to exchange a particular currency on a specific date at a pre determined exchange rate International Finance Corporation: United Nations agency that invests directly in companies and guarantees loans to private investors International Monetary Fund: A United Nations agency to promote trade by increasing the exchange stability of the major currencies Options: They are contracts that give the buyer the right but not the obligation to buy or sell a specified amount of foreign exchange at a set price for an agreed upon period Organisation for Economic Cooperation and Development: An organization that acts as a meeting ground for 30 countries which believe strongly in the free market system Special drawing rights: An artificial currency unit based upon several national currencies Spot market: It is the market where transactions are conducted for the spot delivery of currencies Triangular arbitrage: The opportunity to buy a currency in one country and sell it off in another as prices of one currency can vary from one market to the other World Bank: An organization whose focus is on foreign exchange reserves and the balance of trade        

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