A Crash Course on Foreign Exchange Markets...

The demand for one currency into another decides the fluctuation of foreign exchange transactions. The foreign exchange markets have many different participants who differ from scale of their operations as well as objectives and methods of carrying away the functions. Such as;

* Individuals

* Institutions

* Banks

* Central banks and other official participants

* Speculators and arbitragers

* Foreign exchange brokers

There are four major exposures or risks that a corporation faces when it comes to international business.

* Transaction exposure

* Economic exposure

* Translation exposure

* Tax exposure

There are two types of transactions in foreign exchange market. Spot transactions and forward transactions. In spot market there can be three types of transactions. They are cash, tom and spot exchange.Price quotation in spot market can be categorized as direct quotes and indirect quotes. A bank can be in three positions in spot market. Long, short and square.

The forward market consists of transactions that require delivery of currency at an agreed on future date. Foreign exchange rate can be defined as price of one currency expressed in units of another currency and rates are quoted as bids and offer rates.

Triangular arbitrage refers to taking advantage of a state of imbalance between three foreign exchange markets. Currency futures markets are standard value forward contracts that obligate the parties to exchange a particular currency on a specific date at a predetermined exchange rate.

Two main differences between future and forward markets

* Forward markets can be any size while future contracts has to be specific size

* Forward contracts have relatively wide range of maturities, while future contracts have standardized maturity dates.

There is no perfect foreign exchange forecast or a perfect methodology to forecast foreign exchange rates. The forecasting techniques currently using are;

* Fundamental forecasting

* Technical forecasting

* Assessing market sentiments

Special Drawing Rights and The Floating Rate Era..

Special Drawing Rights which is also known as SDRs were created by the IMF as a reserve asset in 1970. Apart from being an international reserve asset it plays the role of the unit of accounting for the transaction between IMF and it's member countries. Basically the value of SDR was fixed in terms of gold and it is 1 SDR is equal to 0.888671 grams of gold of 35 SDRs being equal to 1 troy ounce of gold.

The currency composition of the new SDR basket is as follows which was introduced in 2000 to solve the actual weighing difficulties of the previous basket went through because many of the currencies in that basket were not actively traded internationally.

US Dollar 45%
Euro 29%
Japanese Yen 15%
Sterling Pound 11%

Floating exchange rate allows a currency's value to fluctuate according to the foreign exchange market. The most important exchange rate arrangements are;

* Pure floating rate
The exchange rate of a country's currency is determined by market considerations like demand and supply.

* Managed or dirty floating rates
Managed float is a necessity of the monetary authority to maintain a certain level of foreign exchange reserves.

* Pegging
A country links the value of it's currency to that of another currency usually that of it's major trading partner.

* Crawling pegs
A country makes small periodic changes in the value of it's currency with the intention of moving to a particular value over a certain period of time.

* Basket of currencies
Many LDCs used this method. This arrangement is similar to that used for valuation of SDRs.

The International Monetary Fund..

The International Monetary Fund (IMF) is the international organization which thoroughly oversees the global financial system by following the macroeconomic policies of it's member countries, created by Bretton Woods Conference. These are the main aims of IMF.

* Helping out the member countries on monetary issues.

* Facilitate the expansion as well as balanced growth in international trade.

* Promote exchange rate stability.

There are 186 member countries and membership in the fund is based on subscription to it's resources in the form of a quota. Quota sizes are determined by a set formula which eye on several factors such as national income, gold and dollar balances, variability of exports, average imports etc. Currently USA has the largest quota and effective veto power over majority decisions.

Forms of IMF Assistance.

* Extended fund facility

* Compensatory financing facility

* Supplementary financing facility

* Enlarged access policy

* Structural adjustment facilities