Question

Explain and discuss the potential reasons why each of the parties listed below participate in Foreign Exchange (FX) markets;

a) Importers,

b) Exporters,

c) Investors,

d) borrowers (Note: You should provide examples to expand your answer for each party.)

Answer 1

a) Importer : An importer who has imported goods to foreign country has foreign currency payables so will have to engage in forex market to hedge himself from devaluation of home currency. If the home currency is devalued than the amount paid  will be higher than the actual amount which will lead to losses for the importer. For eg. Reliance industried importing machinery from US. So Reliance industried will pay USD in future to make payment . Hence they are afraid of rupee devaluation so they will hedge this position by going short forward contracts in rupee.

a) Exporters : An exporter who has exported goods to foreign country has foreign currency recievable  so will have to engage in forex market to hedge himself from appreciation of home currency. If the home currency is appreciated against the foreign currecny  than the amount recieved will be lesser  than the actual amount which will lead to losses for the exporter. For eg. Reliance industried exporting finished goods to US. So Reliance industried will recieve USD in future. Hence they are afraid of rupee appreciation so they will hedge this position by going long forward contracts in rupee.

c) Investors : Investors engage in forex market to benefit from the arbitrage opportunities available in forex market. They keep on checking the trends of teh currencies and their movemnts and buy and selll foreign currencies to earn the margin/ profit.

d) Borrowers - Borrowers may be requrie to take loans. So if they take loans in home country ratres will be cheaper but if they take loans from foreign country the rates will higher. So they enter into foreign currency swap of equal amount and then each of the borrower of two different countried can get their desired loan amount at cheaper cost.