Question

1) Discuss how the foreign exchange market works with dealers and the "bid" and "ask" spread.

2) Discuss the difference between a Forward Currency Contract and a Futures Currency Contract, and how either can reduce the risk of international trade.

3) Discuss the difference among and purpose of the Money Market, Credit Market, and Bond Market.

Answer 1

1) The Bid Ask spread is the difference between the price that the dealer is willing to buy and sell a particular currency.

The Bid price is the price which the dealer is willing to pay for a currency and the Ask price is the price at which the dealer is willing to sell a particular currency, in other words how much a dealer is asking for a particular currency.

2) The difference between forwards and futures contract is ;

The futures are standarized contracts whereas the forwards are customized contracts. The future contracts are exchange trades whereas the forwards are traded over the counter. The existence of the exchange makes the future contracts default free , while the forwards are subject to defaults in the absence of a counterparty.

The futures and forwards contracts helps limit the risk by locking in a price at which future transactions can take place and prevent the losses that can arise as a result of the currency fluctuations.

3) Money market is the market where the short term transactions take place. The market where the short term lending and borrowing of assets normally held for less than a year take place is the money market,

The credit market and the bond market is a market where the issue of debt takes place. For example, the investment grade bonds, junk bonds. Market in which  the government or companies issue debt to investors is called the primary markets . The buying and selling of securities already issued can take place in the secondary market