Individual project 3 Essay Example | Topics and Well Written Essays - 1250 words

Individual project 3 - Essay Example There are two types of Currency Markets; Spot Market is basically a market where immediate transactions take place. Once the transactions are made, they are recorded by the 2nd business day. The main participants by market include brokers commercial banks customers of commercial and central banks Sources of spot quotations come from all major newspapers and major currencies that use different quotes. The spot market has varying prices depending on the number of days from say 30-day through 60-day to 180-day. The spot market recognizes the customers even when making quotations. The costs of Transactions Costs will depend on the market trends as well as a bid-spread basis. This helps us to formulate the spot as well as forward exchange rates. The bid represents the price or cost at which the bidder (mostly bank) is willing to buy while the ask equals to the price at which the bidder will sell the currency bought. The other type of currency market is the forward Market. In this form of currency market, transactions take place only at a specified future date or time. It is characterized by ; arbitrageurs traders hedgers speculators The forward market forms’ main aim is to among other things reduce the cost of trading and provide liquidity. It also serves to threaten people mainly traders of oligopoly of information. This form of currency market is more popular that the former as it boasts of a large market size. For instance, the market a trend in a research done annually in 1995 and that on a daily basis in some major cities is as below. 1995: $1.2 trillion dailyMarket Centers (1995) London =$464 billion New York= $244 billion Tokyo = $161 billion In order to effectively handle the assignment, I have broken it down as below so that it is easier to follow through. To calculate the spot and 12-month forward exchange rates we will first to calculate the PS for both German and China currencies. USA German Revenues forecast =$500 million operations=â‚ ¬100 mi llion Operations=$300million ROS= 12% ROS= 10%= net income China Operations=650 million yuan ROS= 8% This can be done by following a formula given below. 1. 10% of $300=$30 PS= {ask-bid}/ask*100 PS= ({$300-$30}/$300)*100 = $90miliion 2. 12% of â‚ ¬100= â‚ ¬12 PS= {ask-bid}/ask*100 PS= ({â‚ ¬100-â‚ ¬12}/â‚ ¬100)*100 =â‚ ¬88million 3. 8% 650 million yuan= 52 million yuan PS= {ask-bid}/ask*100 = {650-52/650}*100 =92 million yuan The forward exchange rate for German will be 90/88 or $1.0227. Whereas, the forward exchange rate for China will be 90/92 or $0.978. Repatriation can be termed as the process of changing a foreign currency into that of an owner’s country. This is usually dependent on the exchange rate between the two currencies caused by disparities between the economies of scale. A good example would be a South African converting American pound back into South African rand so that they are able to use it. While exchanging the money, the trader will be exposed to something called foreign exchange risk. This is when the trader decides to engage in a foreign exchange swap. In a spot transaction, the condition is that of a bid-ask condition. Therefore, depending on how much the bidder (bank) is willing to offer and how much it will sell then the trader will decide whether to be involved in the transaction. So for instance if the bank is in need of the currency, the trader might actually make a profit out of it(Sellon, 1998, 147-177). In the outright forward repatriation,