Foreign Exchange Rate Markets (FEM) are places where foreign currencies can be gought or sold. Markets found in banks, burae-de-change offices, some exhnges (e,g, Chicago Mercantile Exchange)
Functions of FEM: faciliate payment for international transactions; facilitate investment abroad; facilitate borrowing abroad.
Motives for investng in FEM: economic conditions (eg. relaxation of restrictions in Eastern European countries attracted foreign investors and creditors); exchange rate expectations (some investors purchase financial securities denominated in a currency expected to aprreciate against their own - performance dependent on currency movement over investment horizon); international diversification (cross border differences in econmic conditions can allow for risk reduction benefits)
3 forms of FEM: spot market - buy or exchange currency immediately or in less than 3 working days; forwards market - agree to buy or exchange in three months at a fixed rate; swaps market - agreement involves several transactions, thus a combination of futures - market for swaps has grown.
4 Reasons for growth in FEM': increasing specialisation (comparative advantage) thus need for importation bring's need for exportation thus need use of FEM; increasing gloabiilisation; reduction in tariffs, quotas, currency controls (have to disclose curreny taking upon holidaying like in UK before 1970s); improvements in technology.
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