Foreign exchange markets are one avenue that international businesses take to avoid losses during purchases and shipments. While some may argue that knowing the market and selecting the right technique saves the company money, there are also arguments that the techniques and specialty calculations required for such transactions can actually cost the companies as much as simply letting the market run its course (Giddy, 2003)
It can be argued, however that there is some value to remaining aware of currency exchanges. For example, determining some for of hedging for long-term purchase contracts can help businesses avoid season-related losses (Mizen, 2003)
On such example of the futility of market manipulation is that of Japan. In the 1970's Japan changed its currency exchange rate from the Bretton Woods Exchange Rate System (Taylor, 2001)
This aspect makes options contact significantly different from the forward or futures contract. The buyer has the "call option" giving them the right to buy currency while, the seller has the "put option" giving him/her the derogative to sell currency (Copeland, 2008)
In this agreement, final cash settlements are undertaken only on the set date where the contracting parties realize their gain or loss. Forward currency contract is a private agreement that is not undertaken over -- the counter making the contract more flexible and less standardized compared to futures contract (Eiteman, Stonehill, & Moffett, 2001)
The price limit indicates the maximum daily price alterations. Since a futures contract is assessed on a daily basis, the contracting party is updated whenever significant changes occur in their account that requires them to pay additional amount (Hull, 2006)
Indirect currency intervention are ways to influence this without doing the actual exchange; capital controls, taxes, restrictions, exchange controls, etc. (Graham, 2000)
Foreign exchange markets enhance international investment and trading by enabling currency conversion, allowing commerce to occur within that country's monetary system, but globally. The market also helps buttress the speculation in foreign currencies, the interest rate difference and value of the currency between two countries (Levinson, 2006)
Agents can also view futures on exchange rates by looking at how certain countries are intervening in monetary policy. This method requires the reading of signals, because the change of expectations rate will also affect the current market rate (Muss, 1981)
The manipulation of both covert and overt methods to influence the market do take time to balance out the equation. Simple 1-2 trades will not balance out past rivalries or animosities (Pettinger, 2010)
This then, causes broader changes in the interest rate, market expectations, supply of money, and thus ultimately the exchange rate. For instance, the purchase of foreign-currency bonds usually causes the increase of the home-country's money supply and then decreases the exchange rate (Sarno and Taylor, 2001)
.the great the gap, the bigger the currency-market upheaval," asserts an article in The Economist (Begg, 1997)
The exchange rate theories can be classified into three categories- the partial equilibrium model, general equilibrium models and disequilibrium models. The partial equilibrium models "include relative PPP and absolute PPP, which only consider the goods market" (Kanamori and Zhao, 2006)
149 trillion dollars of holdings in the U.S. economy as of April 2011 (Wan, 2011)
And Western Asset Management Co. are increasing bets on the yuan appreciating the analysts forecast the currency will gain at triple the rate reflected in prices of forwards contract" (Yong and Teso, 2010)