This report tends to analyze rather practical side than theoretical side for the spot exchage transaction forward exchange transaction and the problems of foreign exchange transactions Now main contents in this report are as follows.
Trading in the f...
This report tends to analyze rather practical side than theoretical side for the spot exchage transaction forward exchange transaction and the problems of foreign exchange transactions Now main contents in this report are as follows.
Trading in the foreign exchange markets includes not only currencies for immediate delivery (spot exchange) but also forward exchange, currencies to be delivered on a specified date. A market in forward exchange exists prinicpally because persons committing themselves to future transactions involving foreign currencies want to know now what these commitments will be worth at maturity in their home currencies. Thus, a United States importer of British goods may be obliged to pay the shipper in sterling ninety days hence. If the price of sterling falls in the interim, say because the pound is devalved, his profits from the importing transaction are increased. But if the price of sterling rises, his profits are reduced or wiped out. He may wish to avoid taking his chances on either of these outcomes. A possible solution for him of course, would be to purchase spot sterling now and hold it for ninety days. That would eliminate the exchange risk, but it would tie up his capital and perhaps cost him interest. A better solution, potentially, is to hedge his future payment by a forward purchase of sterling. That is, he enters a contract to pay a specified number of dollars ninety days hence in exchange for the sterling he will need.
And there is other transaction in the forward market. That is arbitrage, speculation etc.
Arbitrage is a general term in economics for buying something where it is cheap and selling where it is dear. If the price of swiss francs in New York falls below that in London by more than the (small) cost of transaction, it pays to buy in New York and sell in London: This is foreign exchange arbitrage. It tends to continue until the difference disappears, and speculation is the transaction with a view to profiting from the discrepancy between the current forward rate and the probable future spot rate that the operator expects to prevail.