Question-1:

What is foreign exchange market? Explain

the major players of the foreign exchange
market.

Foreign Exchange Market :

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. The foreign exchange
market is a global online network where traders buy and
sell currencies. It has no physical
location and operates 24 hours a day from 5 p.m. It sets
the exchange rates for currencies with
floating rates. So, the foreign exchange market or forex
market is the market where currencies
are traded. The forex market is the world‘s largest
financial market where trillions are traded
daily. It is the most liquid among all the markets in the
financial world.

The major players of foreign exchange market are :

1. Commercial and Investment Banks.
2. Central Banks.
3. Businesses and Corporations.
4. Fund Managers, Hedge Funds, and Sovereign Wealth
Funds.
5. Internet-based Trading Platforms.
6. Online Retail Broker-Dealers.
Commercial and Investment Banks central
strategies :
Banks need no introduction; they are ubiquitous and
numerous. Their role is crucial in the Forex
network. The banks take part in the currency markets to
neutralize the foreign exchange risks of
their own and that of their clients. The banks also seek to
multiply the wealth of their
stockholders.
Each bank is different in terms of its organization and
working policy, but each one of them has
a dealing desk responsible for order processing, market-
making, and risk management. The
dealing desk plays a role in making profits by trading
currency straight through hedging,
arbitrage, or a mixed array of financial strategies.
Central Banks :
A central bank is the predominant monetary authority of
a nation. Central banks obey individual
economic policies. They are usually under the authority
of the government. They facilitate the
government‘s monetary policies (dealing with keeping
the supply and the availability of money)
and make strategies to smoothen out the ups and downs
of the value of their currency.
We have earlier discussed the reserve assets. Central
banks are the bodies responsible for
holding the foreign currency deposits called "reserves"
aka "official reserves" or "international
reserves".
Business and Corporations :
All participants involved in the forex market do not have
the power to set prices of the currency
as market makers. Some of the players just buy and sell
currency following the prevailing
exchange rate. They may seem to be not so significant,
but they make up a sizeable allotment
of the total volume that is being traded in the market.
There are companies and businesses of differing sizes;
they may be a small importer/exporter
or a palpable influencer with a multi-billion Dollar cash
flow capability. These players are
identified by the nature of their business policies that
include: (a) how they get or pay for the
goods or services they usually render and (b) how they
involve themselves in business or
capital transactions that require them to either buy or
sell foreign currency.
Fund Managers, Hedge Funds, and Sovereign Wealth
Funds :
This category is not involved in defining the prices or
controlling them. They are transnational
and home-country‘s money managers. They may deal in
hundreds of millions of dollars, as their
portfolios of investment funds are often quite large.
These participants have investment charters and
obligations to their investors. The major aim of
hedge funds is to make profits and grow their portfolios.
They want to achieve absolute returns
from the Forex market and dilute their risk. Liquidity,
leverage, and low cost of creating an
investment environment are the advantages of hedge
funds.
Internet-based Trading Platforms :
Internet is an impersonal part of the forex markets
nowadays. Internet-based trading platforms
do the task of systematizing customer/order matching.
These platforms are responsible for
being a direct access point to accumulate pools of
liquidity.
There is also a human element in the brokering process.
It includes all the people engaged from
the instant an order is put to the trading system till it is
dealt and matched by a counterparty.
This category is being handled by the "straight-through-
processing" (STP) technology.
Online Retail Broker-Dealers :
The last segment of the Forex markets, the brokers, are
usually very huge companies with huge
trading turnovers. This turnover provides the basic
infrastructure to the common individual
investors to invest and profit in the interbank market.
Most of the brokers are taken to be a
market maker for the retail trader. To provide a
competitive and popular two-way pricing model,
these brokers usually adapt to the technological changes
available in the Forex industry.
Question-2: Explain foreign exchange trading
process.

Ans: Traders trade foreign currencies in hopes that they

can profit from the changes in the exchange rate
between the two currencies. To gain access to the
Foreign Exchange market, commonly called FOREX, you
have to open an account with a broker and begin trading.
You also need a basic understanding of currency pairs
and how to trade them.
Currency Pairs
One of the most basic terms in the FOREX market is
"currency pair." To trade the market, you have to
understand what a currency pair is and how it works.
Currencies are paired with other currencies in standard
pairs. For example, if you wish to trade the Euro against
the United States Dollar, you would trade the EUR/USD
pair. When you buy the EUR/USD pair, you are buying
the Euro and selling the dollar.
Traders
The majority of traders in the market are institutional
traders. Institutional traders are exchange banks who
exchange with other banks every day. This market is the
single largest financial market in the world because of
the size of the institutional traders involved. Individuals
can also get involved by working with a FOREX broker.
People trade this market from all over the world at all
times. Traders can access the market 24 hours a day five
days per week.

Brokers
To trade the market, you have to have an account with a
FOREX broker. FOREX brokers are situated all over the
world and there is not a central agency that governs all of
them. You can open an account by filling out a basic form
and proving your identity. Then you can fund the account
with payment through check, credit or debit card, or wire
transfer. At that point, you can trade currencies in the
market.
Platform :
Once you have an account with a broker, you can
download the broker's trading platform to your
computer. This trading platform will allow you to look at
price charts with real-time pricing information on all of
the major currency pairs. You can use indicators and
other tools on the trading platform to aid in your trading
decisions. Once you are ready to place an order, you can
do so from your platform without contacting the broker.
Orders :
When you decide that you want to get into the market,
you can place one of a few different types of orders. If
you want to get into the market as quickly as possible,
you can simply place a market order. This fills your order
at the price that is available in the market. You could also
place a limit order that fills your order once the market
gets to a certain point.

Question-3: Narrate major foreign exchange

market with example.

1)The spot market:

Spot market is a market in which trading takes place for immediate delivery.
Examples of spot markets are the market for securities, commodities, and foreign
exchange (forex).

Ideally, delivery takes place a few seconds after completion of the transaction.
However, in reality, it lasted more than twenty-four hours. In the spot forex and stock
markets, immediate delivery means two business days. For commodities, that means
in seven days.
Transactions take place on an exchange. However, some spot markets also take
place over the counter. In a sense, transactions occur via telephone trading rather
than on an organized exchange floor.

The current price of the traded goods is called the spot price. It is the price at which
the item can be sold or purchased immediately. Buyers and sellers make up spot
prices by posting their buy and sell orders.

Examples of the spot market

Examples of spot markets are commodity markets, stocks, and currency markets.

Commodity markets transact various agricultural and mining products such as palm
oil, coffee, tea, seeds, gold, oil, and natural gas. To be traded on the spot market,
they must meet specific standards.Take the spot oil market, for example. Market
participants consist of crude oil producers, refiners, and large distributors or
consumers of oil products. Transactions are usually highly standardized, especially in
delivery location, cargo delivery base (FOB or CIF), transportation mode, and
transaction settlement period. Meanwhile, spot oil prices usually rely on publications
from third party pricing agencies such as Platts.

Spot market for shares takes place on the Exchange, which brings together buyers
and sellers. Examples are the Indonesia Stock Exchange for the Indonesian market
and the New York Stock Exchange (NYSE) for the American market.

Foreign exchange market is the world’s largest financial market. Transactions per
day reached an average of $6.6 trillion per day in April 2019, of which around $2
trillion were spot transactions. The actual transaction is completed 2 days after the
trade has been agreed upon by the parties. Market participants mainly consist of
commercial banks and world primary securities dealers.

2)Forward market:
Forward Market refers to a market which deals in over
the counter derivative instruments and thereby agree to
take delivery on a set price and time in the future. In
addition, the contract can be customized with regard to
the rate, quantity and also with regard to the date.
Forward markets are used for trading a range of
instruments,but the term is primarily used with
reference to the foreign exchange market.It can also
apply to markets for securities and interest rates as well
as commodities.

KEY TAKEAWAYS

• Forward contracts differ from future contracts in

that they are customizable in terms of size and
length, or maturity term.
• Forward contract pricing is based on interest
rate discrepancies.
• The most commonly traded currencies in the
forward market are the same as on the spot
market: EUR/USD, USD/JPY and GBP/USD.

Example:
Let us consider the example of a farmer who
harvests a certain crop and is unsure of its price
three months down the line. In this case, the farmer
can enter into a forward contract with a certain
third party by locking in the price at which he would
sell his crop in the upcoming three months. The
market for such a transaction is known as the
forward market.

3) Options
An option is a contract that allows (but doesn't
require) an investor to buy or sell an underlying
instrument like a security, ETF or even index at
a predetermined price over a certain period of time.
Buying and selling options are done on the options
market, which trades contracts based on
securities. Buying an option that allows you to buy
shares at a later time is called a "call option,"
whereas buying an option that allows you to sell
shares at a later time is called a "put option."

However, options are not the same thing as stocks

because they do not represent ownership in a
company. And, although futures use contracts just
like options do, options are considered a lower risk
due to the fact that you can withdraw (or walk away
from) an options contract at any point. The price of
the option (it's premium) is thus a percentage of the
underlying asset or security.

When buying or selling options, the investor or trader

has the right to exercise that option at any point up
until the expiration date - so simply buying or selling
an option doesn't mean you actually have to
exercise it at the buy/sell point. Because of this
system, options are considered derivative securities
- which means their price is derived from something
else (in this case, from the value of assets like the
market, securities or other underlying instruments).
For this reason, options are often considered less
risky than stocks (if used correctly).

example:It involves buying a long call option for a

$2 premium (so for the 100 shares per contract, that
would equal $200 for the whole contract). You buy
an option for 100 shares of Oracle (ORCL) - Get
Oracle Corporation Report for a strike price of $40
per share which expires in two months, expecting
the stock to go to $50 by that time. You've spent
$200 on the contract (the $2 premium times 100
shares for the contract). When the stock price hits
$50 as you bet it would, your call option to buy at
$40 per share will be $10 "in the money" (the
contract is now worth $1,000 since you have 100
shares of the stock) - since the difference between
40 and 50 is 10. At this point, you can exercise your
call option and buy the stock at $40 per share
instead of the $50 it is now worth - making your
$200 original contract now worth $1,000 - which is
an $800 profit and a 400% return

4) Futures Market

A futures market is an auction market in which

participants buy and sell commodity and futures
contracts for delivery on a specified future date.
Futures are exchange-traded derivatives contracts
that lock in future delivery of a commodity or security
at a price set today.
Example
Example of futures markets are the New York
Mercantile Exchange (NYMEX), the Kansas City
Board of Trade, the Chicago Mercantile Exchange
(CME), the Chicago Board of Trade (CBoT),
Chicago Board Options Exchange (CBOE) and the
Minneapolis Grain Exchange.
Originally, such trading was carried on through open
outcry and the use of hand signals in trading pits,
located in financial hubs such as New York,
Chicago, and London. Throughout the 21st century,
like most other markets, futures exchanges have
become mostly electronic.
KEY TAKEAWAYS

• A futures market is an exchange where futures

contracts are traded by participants who are
interested in buying or selling these derivatives.
• In the U.S. futures markets are largely regulated
by the commodities futures clearing commission
(CFTC), with futures contracts standardized by
exchanges.
• Today, the majority of trading of futures markets
occurs electronically, with examples including
the CME and ICE.
• Unlike most stock markets, futures markets can
trade 24 hours a day.