Question and Answer
Each of the participants of foreign exchange is explained below:
Customer and Travelers:
Consumers are the people who might buy goods in a foreign nation or from a foreign supplier via the internet. The modern way of purchase is directed by the internet through credit cards. After a purchase is made from the internet, the amount paid in foreign currency will be converted into their domestic currency which will appear on their bank statements. Travelers are the people who seek help from banks to convert home country’s currency to another country where they are traveling.
Businesses:
There are several businesses or multinational companies which need to convert the currency in order to do business outside the home country. The amount of money converted each year also depends on the size of business.
Investors and Speculators:
They need currency exchange in order to conduct foreign investments such as bonds, deposits, real estate, etc. They also intend to grab benefits from fluctuation in the currency market.
Government and Central Banks:
They exchange the currencies in order to stabilize the economy or intervene in imbalanced economic or financial inconsistency. These institutions are non-profit based, so the exchange is not used with the intention to earn additional revenues.
Why are contingent assets and liabilities like options? What is meant by the delta of an option? What is meant by the term notional value?
Contingent assets and liabilities may or may not appear on the assets and liabilities section of the balance sheet which is analogous to the choice of exercising or not exercising an option. Such asset or liabilities are dependent on the occurrence of a different event. Thus, the realization of the event depends on or contingents on the happening of some other event. Contingent assets and liabilities are optional since it is based on some other factors. So, it might not be represented on the balance sheet. The delta of an option relay to the sensitivity of an option with respect to the per unit change in the price of the basic security. The delta helps to determine the new value or change in the value of option being considered in case the price level fluctuates in the market. The notional value refers to the value that will be given in the case of the occurrence of the contingent event. The notional value is used for the contingent asset or liability. It will reflect the value that will be on the balance sheet for assets and liabilities if the contingent event occurs. The notional value is only determined after the continent event happens.
In the FX market, international banks form the core of FX market where they serve different kinds of FX client. The Foreign transaction is facilitated by them. Out of total FX trade, 14% are retail while 86% is represented by the transaction among the international banks and large non-bank dealers.
All of the market participants in the market are looking for the profit, and they look for riskless profit. The only way to riskless profit is arbitrage. By buying something in lower price and selling it at higher price provides the arbitrage. In the triangular arbitrage, a triangle of the transaction is made to earn the profit.
The companies that operate in diverse risk prefer contingent assets. To minimize the risk, generally, companies are involved in buying and selling of the contingent assets. They buy options to minimize the risk. However, it might produce both positive and negative return, the subject of which cannot be actually predicted.
