Forex Markets
What is Forex?
o A global market where currencies are exchanged.
o Example: A U.S. company buys machinery from Germany, paying in Euros
instead of Dollars.
• Why is Forex Important in International Business?
o Facilitates cross-border trade and investments.
o Example: Toyota profits are affected by the exchange rate between the
Japanese Yen and the U.S. Dollar.
Slide 2: Key Participants in the Forex Market
• Central Banks
o Set interest rates and influence currency value.
o Example: The European Central Bank (ECB) raising interest rates can
strengthen the Euro.
• Commercial Banks and Financial Institutions
o Facilitate large transactions between companies.
o Example: JPMorgan assisting Amazon in converting U.S. Dollars to British
Pounds.
• Corporations
o Hedge currency risks to protect profits.
o Example: Apple hedging against currency fluctuations when sourcing parts from
China.
• Retail Traders & Investors
o Speculate on currency prices for profit.
o Example: A retail trader buys Euros expecting the Euro to rise against the Dollar.
• Governments
o Intervene to stabilize their national currencies.
o Example: The Bank of Japan intervened to weaken the Yen in 2023.
Slide 3: Types of Forex Markets and Transactions
• Spot Market
o Immediate exchange of currencies.
o Example: A tourist converts U.S. Dollars to Euros at a currency exchange booth
in Paris.
• Forward Market
o Contract to exchange currencies on a future date at a set rate.
o Example: Nike enters a forward contract to buy Chinese Yuan in 6 months for
manufacturing payments.
• Futures and Options Market
o Derivative contracts used for speculation or risk management.
o Example: A U.S. investor buys Euro futures to hedge against potential Euro
appreciation.
• Exchange vs. OTC (Over-the-Counter)
o Forex is mostly OTC with decentralized transactions.
o Example: Major Forex transactions happen between banks over the counter
rather than on a centralized exchange.
Slide 4: Factors Influencing Exchange Rates
• Economic Indicators
o Higher interest rates usually strengthen a currency.
o Example: The U.S. Dollar strengthened when the Federal Reserve raised rates
in 2023.
• Political Events and Stability
o Elections and geopolitical tensions affect exchange rates.
o Example: The British Pound dropped sharply after Brexit in 2016.
• Monetary Policy
o Central banks control money supply and interest rates.
o Example: The Bank of England's decision to cut interest rates caused the Pound
to weaken.
• Market Sentiment and Speculation
o Currency prices reflect trader expectations.
o Example: Speculators sold off the Turkish Lira in anticipation of inflation
problems.
Slide 5: Risks in the Forex Market
• Exchange Rate Risk
o Currency fluctuations affect business profits.
o Example: A U.S. exporter’s profit margin shrinks when the Dollar strengthens
against the Euro.
• Country Risk
o Political instability disrupts exchange rates.
o Example: The Russian Ruble plunged after geopolitical tensions in 2022.
• Liquidity Risk
o Some currency pairs are harder to trade.
o Example: Exotic currencies like the Icelandic Krona have limited buyers and
sellers.
• Counterparty Risk
o Risk that the other party in a Forex deal defaults.
o Example: A small bank failing to honor its currency swap agreement with
another institution.
Slide 6: Role of Forex in International Business
• Facilitating International Trade
o Companies need to convert currencies for cross-border sales.
o Example: Starbucks converts U.S. Dollars to Brazilian Real to purchase coffee
beans.
• Hedging Exchange Rate Risk
o Companies lock in exchange rates to avoid losses.
o Example: Tesla uses currency forwards to hedge against Euro/Dollar
fluctuations.
• Foreign Direct Investment (FDI)
o Currency value impacts FDI decisions.
o Example: A weaker Yen attracts foreign companies to invest in Japan.
• Competitive Advantage
o Currency shifts influence export pricing.
Slide 5: Risks in the Forex Market
• Exchange Rate Risk
o Currency fluctuations affect business profits.
o Example: A U.S. exporter’s profit margin shrinks when the Dollar strengthens
against the Euro.
• Country Risk
o Political instability disrupts exchange rates.
o Example: The Russian Ruble plunged after geopolitical tensions in 2022.
• Liquidity Risk
o Some currency pairs are harder to trade.
o Example: Exotic currencies like the Icelandic Krona have limited buyers and
sellers.
• Counterparty Risk
o Risk that the other party in a Forex deal defaults.
o Example: A small bank failing to honor its currency swap agreement with
another institution.
Slide 6: Role of Forex in International Business
• Facilitating International Trade
o Companies need to convert currencies for cross-border sales.
o Example: Starbucks converts U.S. Dollars to Brazilian Real to purchase coffee
beans.
• Hedging Exchange Rate Risk
o Companies lock in exchange rates to avoid losses.
o Example: Tesla uses currency forwards to hedge against Euro/Dollar
fluctuations.
• Foreign Direct Investment (FDI)
o Currency value impacts FDI decisions.
o Example: A weaker Yen attracts foreign companies to invest in Japan.
• Competitive Advantage
o Currency shifts influence export pricing.
o Example: A depreciated South Korean Won makes Samsung products cheaper
for foreign buyers.
Slide 7: Current Trends and Challenges in Forex
• Emerging Market Currencies
o Growing role of non-traditional currencies.
o Example: BRICS nations (Brazil, Russia, India, China, South Africa) pushing for
more currency use in trade to reduce Dollar reliance.
• Cryptocurrencies vs. Fiat
o Potential disruption of traditional Forex markets.
o Example: Bitcoin being used in cross-border payments instead of traditional
currencies.
• Environmental, Social, and Governance (ESG) Impact
o ESG policies influence currency value.
o Example: European countries with strong ESG policies may attract capital
inflows, strengthening the Euro.
• Recent Forex Volatility
o Example: U.S. Dollar volatility following inflation data or political uncertainties
affects global trade.