Foreign Exchange Case Study

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Suppose you have a company and have to make a US$ 3 million payment in three months’ time. The dollars are available with you and need to decide on how to invest them in three months. You are given with the following information: a. US deposit rate is 9% per annum b. The sterling deposit rate is 10% per annum c. The spot exchange rate is $1.91 per pound. d. The four months forward rate is $1.79 per pound. Questions: 1. Where should your company invest to get better returns? 2. What forward rates would yield an equilibrium situation by assuming that US interest rate remains same with forward and spot rates 3. What would be the equilibrium sterling deposit rates? To answer the above questions, you are required to go through this chapter and…show more content…
Individuals: The individuals here means the tourists who exchange the money while travelling abroad and migrants who send part of their earnings to family members living in their home countries. b. Firms: The firm means importers and exporters where an exporter prefers to get his payments in his home currency or in a convertible currency. Importers require the foreign exchange to make payments for their products that are imported. c. Banks: The individuals and firms approach banks to exchange the currency and the banks deal other banks which has foreign exchange departments on behalf of its customers. Banks apply and get the approval to act as an authorised dealer for foreign exchange. The two important tiers of foreign exchange are that one transaction between customers and banks and the other one is the transactions between banks. The inter bank transactions helps to meet the demands of foreign exchange customers and also reap the gains of foreign exchange rates. Generally inter banks does not take any help of the intermediaries but the banks deal through the foreign exchange brokers. The amount of purchase and sale of currency bought and sold Commercial banks also help the foreign exchange markets to stabilise the domestic…show more content…
The average daily turnover in currency derivatives in India which includes (forward and option market) was 25,500 crore in April 2012 and slowly rises up to 41,000 crore in February 2013. Further increase in volume is expected since the foreign institutional investors are allowed to participate in the exchange-traded derivatives segment. The Indian Forex is expected to grow further with positive developments and one can become a positive stakeholder in the world currencies market. Exchange Rate Mechanism (ERM): Exchange Rate Mechanism is designed to control the foreign exchange rate with respect of other currencies. Also to normalize the currency exchange rates within a range and to avoid any problem in the market. It is the ratio of exchange between the two currencies. There is a price fixed for every purchase or sale of a currency. This price is known as the exchange rate. The number of units of one currency that is exchanged for a unit of another currency is known as exchange rate mechanism. There are two types of

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