Assignment # 0

Submitted to:

Sir Mustafa

Submitted by:

Ali Raza

Roll No:

17132120-009

Class:

BBA 5th

UNIVERSITY OF GUJRAT

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SUMMARY:
The Foreign Exchange Market is a market where the buyers and sellers are involved in the sale
and purchase of foreign currencies. In other words, a market where the currencies of different
countries are bought and sold is called a foreign exchange market.

An exchange rate is the value of one nation's currency versus the currency of another nation or
economic zone. The basic and the most visible function of foreign exchange market is the transfer
of funds (foreign currency) from one country to another for the settlement of payments. It basically
includes the conversion of one currency to another. Another function of the foreign exchange
market is to provide credit, both national and international, to promote foreign trade. A third
function of the foreign exchange market is to hedge foreign exchange risks. Hedging means the
avoidance of a foreign exchange risk.

A spot exchange rate is the current price level in the market to directly exchange one currency for
another, for delivery on the earliest possible value date. A forward exchange contract is a special
type of foreign currency transaction.

Forward contracts are agreements between two parties to exchange two designated currencies at
a specific time in the future.

A currency swap is an agreement in which two parties exchange the principal amount of a loan
and the interest in one currency for the principal and interest in another currency. At the inception
of the swap, the equivalent principal amounts are exchanged at the spot rate.

The law of one price is the economic theory that states the price of an identical security,
commodity or asset traded anywhere should have the same price regardless of location when
currency exchange rates are taken into consideration, if it is traded in a free market with no trade
restrictions.

Purchasing Power Parity says that since they are the same goods, the purchasing power in the
countries should be the same. This doesn't mean the exchange rate should be equal to one; it means
the ratio of price to exchange rate should be one.

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The two most commonly used methods for forecasting exchange rates are; Fundamental
Approaching is a forecasting technique that utilizes elementary data related to a country, such as
GDP, inflation rates, productivity, balance of trade, and unemployment rate. The principle is that
the ‘true worth’ of a currency will eventually be realized at some point of time.

Technical Approach is approach, in which the investor sentiment determines the changes in the
exchange rate. Freely convertible currency, is a currency that doesn't have any government
restrictions on currency exchange. Obvious examples of fully convertible currencies are the US
dollar and the Euro. Non-convertible Currency is when a country's government allows neither
residents not non- residents to convert its currency into a foreign currency. A non-convertible
currency is one that is used primarily for domestic transactions and is not openly traded on a forex
market. This is usually the result of government restrictions, which prevent it from being
exchanged for foreign currencies.

Countertrade is a reciprocal form of international trade in which goods or services are exchanged
for other goods or services rather than for hard currency. This type of international trade is more
common in developing countries with limited foreign exchange or credit facilities.

Capital flight is a large-scale exodus of financial assets and capital from a nation due to events
such as political or economic instability, currency devaluation or the imposition of capital controls.
Capital flight may be legal, as is the case when foreign investors repatriate capital back to their
home country, or illegal, which occurs in economies with capital controls that restrict the transfer
of assets out of the country.

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