Each country Essay
Each country is recognized by its currency for both domestic as well international business and money transactions. Both money market and foreign exchange market are interconnected and it is almost impossible isolate one from another. The point here is, how to define a money market? The answer is, when an article is sold or purchased with an exchange of “money” which is a financial paper representing a sum of money owing to one another by virtue of sale our purchase. Currency is cash, which is usually carried by people for various purposes. Currency is money and Government Treasury Bills are near-money.
Money markets are completely controlled and monitored by central banks, commercial banks and financial institutions. Each bank or financial institutions is accountable to central bank in terms of maintaining liquidity, solvency and for distribution of money. Exchange of money has been in use for almost a century now for any commercial purpose of buying or selling indicating that a commercial transaction has taken place, either buying a home or stock market shares / Treasury Bills. Money in exchange has been a common practice for any commercial transaction.
A similar procedure is applicable in foreign exchange market, that each time a transaction is recorded, foreign exchange is either sold or purchased. Like any other market, money market and the foreign exchange market record high and low of currencies exchange which depend upon whether one is selling or buying. Traders of foreign exchange market provide tw prices. The first being the willing price to buy foreign currency and second being the willing price to sell foreign currency. It is here that traders benefit in making profits in foreign exchange transactions.
If a lender receives $108 at the end of an year, $100 being loan refund and $8 is interest per annum that is given to lender. Interest rates are either per annum or per month or per quarter which is called flat interest rate. For example if interest rate is 2 per cent per month, per annum interest is 24 per cent. (2 x 12) . Most of the financial instruments are traded on discounted basis which means, the borrower has to pay interest at the time of considering the loan i. e. If loan amount is $100 and interest per annum is $8, the borrower receives only $92. ($100 – $8 = $92).
If the principal along with interest is refunded at the end of an year, it is called as balloon payment. ($100 + $8 = $108) . Banks usually negotiate interest rates with clients while considering huge amounts as loans depending on the goodwill and repayment capacity of clients. Banks accepts deposits from clients on a certain surety of payment of interests either quarterly, monthly or per annum. Foreign currency market exists all over the world in each nation with the fact that, every country’s export or import business requires exchange of foreign currency for payment of foreign transactions or EXIM business.
The flow of cash in various currencies i. e. either in US dollars, Euros, Yen or any other currency is important as it increases or decreases the cash balances. Cash flow always carry a significant direction, currency, date and location where the cash flow is given. Cash flows can be either inflow or outflow. Foreign exchange markets always carry two currencies, one currency is being sold, and the other currency is being purchased. The funds manager verifies the characteristics of cash flow whether the following are present in foreign exchange transaction.
1. The name of the second party to the transaction. 2. State whether the specific currency is being sold or purchased. 3. The total amount involved in transaction. 4. The location where the funds or instruments is purchased. 5. The location where the second party requires the funds to be purchased. 6. The rate for the transaction. 7. Value date. Cash flows are aggregated in two groups. The first being net cash flow per currency by specific value date and second being net exchange position of each currency with aggregate value of dates.
The concept of value date has a great importance in the matters of foreign currency exchange transactions with two dimensions which are as follows: 1. Spot transactions carry value date of 2 business days with its closure on the following day when the transaction is closed. 2. Forward transactions carry value date for future, with specific date from the spot value date, at the time of transaction. Value date indicates in flow of cash, cash expected in the future for commercial banks and central banks especially in foreign currency exchange transactions.
A very good scope of interaction exists between money market and foreign currency exchange market. For instance : 1. A cash flow of € 3 million is expected on value date October 31 to an European money exchange bank from another country. Here the value date is October 31. 2. A cash flow of $ 10 million is expected on value date December 31 to another European Bank. Here the value date is December 31. The above example indicates the net cash flow includes both spot transaction and future transaction of foreign currency exchange. The responsibility of funds manager is as follows: 1.
On receipt of funds in euros, the entire amount will be deposited in the account of euro cash balance. 2. On receipt of funds in dollars, the entire amount will be deposited in the account of dollars cash balance. Banks maintain a regular cash balances of respective foreign currency exchanges and accordingly lend loans with certain interest rates and also issue currencies against exchange for commercial transactions. On every day basis the business days carry exchange rates which quote high and low according to the demand of buy and sell of traders of foreign currency exchange and also depending on the stock market sensex with FII inflows.
One important aspect of foreign exchange currency is to be noted is here that the traders of foreign currency exchanges play a vital role in bidding and buying foreign currencies. For example if a trader bids 120. 00-05 on dollar/Yen, which means to buy dollar at 120. 00 and sell Yen or sell USD at 120. 05. Conclusion Among all regional respective currencies of each nation, United States Dollar has been accepted universally for both domestic as well international foreign exchange currency services and for global business transactions.
Commercial transaction amount is converted into USD and paid accordingly which is converted from regional currency. For example if a Euro businessmen purchases 500 computers from IBM, deal of business amount that is calculated in Euros is converted into USD and paid to IBM which is were foreign currency exchange converter is required. The Financial Accounting Standards Board’s (FASB 52) defines Foreign Currency Translation, defines GAAP U. S. Generally Accepted Accounting Principles requirements for foreign currency revaluation.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 1 December 2016
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