Internation finance Essay Example | Topics and Well Written Essays - 2000 words

Internation finance - Essay Example Owing to the use of foreign exchange in many transactions, businessmen have to hedge their exposures overseas, and to do this they would need to use currencies too to protect their assets or receivables that are denominated in foreign currencies. Others use foreign currencies to engage in speculation abroad, and many mutual funds and hedge funds engage in speculation for possible profit. Thus foreign currencies are necessary to make international trade and investments possible and to help smooth transactions in the tourism industry in many countries. Unlike the stock exchanges, there is no single formal foreign exchange market; it is in fact an over the counter market similar to the one for money market instruments. The main participants are the large multinational commercial banks and investment banking houses. They operate at two levels, the wholesale level where banks operate in the interbank market; and at the retail level, where they deal with individuals and corporations. However, many transactions are mediated by foreign exchange brokers in order to preserve the anonymity of the transacting parties (Kidwell et al 377). The other major participants are the central banks of many countries which may intervene in the market from time to time to modulate the fluctuations of their currencies. Other participants are individuals and non-financial businesses who enter the market for various reasons including speculation. Foreign exchange trading operates without fixed trading hours, round the clock, everyday of the year: When one market closes another elsewhere in the world opens. There are no written rules, and transactions are done according to some principles and code of ethics (Hill 322) There are two basic types of foreign exchange quotations – the spot land forward market. The spot market, with quotations by