What is FOREX?

What is FOREX?

Investors, banks, businesses and

governments buy and sell world
currencies.
What is FOREX?
 What is FOREX?

By far the largest most liquid market in

the world.
What is FOREX?

“Need to exhange
currencies.”
What is FOREX?

No central marketplace, currency trading is

conducted electronically over-the-counter
(OTC)
What is FOREX?

24-hour
Market
What is FOREX?

Daily deals worth $4

billion/trillion
What are the functions of FOREX?
What are the functions of FOREX?
1. Transfer Function
- transfers purchasing power
between the countries involved in the
transaction.
- performed throug credit
instruments like bills of foreign exchange,
bank drafts and telephonic transfers.
What are the functions of FOREX?
2. Credit Function
Credit is provided by foreign exchange
markets to finance international trade
transactions.
Bill of exchange in the FOREX market
What are the functions of FOREX?
3. Hedging Function
- The foreign exchange market enters
into a forward contract to sell the foreign
exchange at a predetermined rate.
Online Forex Trading Platforms:
 FOREIGN
EXCHANGE MARKET
SYSTEM
 TYPES OF FOREX MARKET
SYSTEM
Fixed Exchange Rate System is an exchange
rate regime where the government or central
bank ties the official exchange to a currency
of another country or the price of gold.
 TYPES OF FOREX MARKET
SYSTEM
Free-floating Exchange Rate System is an
exchange rate regime where the currency
price is set by the FOREX Market based on
supply and demand compare with other
currencies.
 MARKET PARTICIPANTS

Foreign Exchange Dealers are money

changers and remittances agents who are
engaged in buying and selling of foreign
currencies.
 MARKET PARTICIPANTS

Participants in Commercial and Investment

Transactions buy and sell foreign currencies
for their clients and trade for themselves.
 MARKET PARTICIPANTS

Speculators are FOREX market participants

who seek profit from changes in exchange
rates.
Arbitrages are FOREX market participants
who try to profit from simultaneous
exchange rate differences in different
markets.
 MARKET PARTICIPANTS

Government and Central Banks improve

economic conditions and they intervene to
adjust economic or financial imbalances.
 MARKET PARTICIPANTS

Foreign Exchange Brokers provide their client,

the bank with the information about the
exchange rate at which banks are willing to
buy or sell a particular currency.
 FOREIGN EXCHANGE
TRANSACTIONS
Terms to remember when entering FOREX Market
 Exchange rate-is a measure of how much of one
currency may be exchange for another currency.
 Direct quote-measures how much of domestic
currency must be exchanged to measure one unit of
a foreign currency. P1:$.02
 FOREIGN EXCHANGE
TRANSACTIONS
Terms to remember when entering FOREX Market
 Indirect Quote- measure how many units of foreign
currency will be received fro one unit of domestic
currency. $1:P50
 FOREIGN EXCHANGE
TRANSACTIONS
Terms to remember when entering FOREX Market
 Spot rate-indicates the number of units of currency
that would be exchanged for one unit of another
currency on a given date.
 Forward rate- establishes, at one point in time, the
number of units of one currency to be exchanged
for one unit of another currency at a specified
future date.
 FOREIGN EXCHANGE
TRANSACTIONS
Example of FOREX Transactions
 On September, 9 2015, Selma Inc. accepted noncancellable
merchandise sales order from Japanese firm. The contract
price was 100,000 yens. The merchandise was delivered on
Dec. 14 2015. The invoice was dated Dec. 11, 2015, FOB
seller. Full payment was received Jan. 22, 2016. Spot rate are
the following for japanese yens.
Sept. 9 2015 Dec. 11 2015 Dec. 14 2015 Dec. 31 2015 Jan. 22, 2016
P.75 P.78 P.77 P.73 P.725
 FOREIGN EXCHANGE
TRANSACTIONS
Example of FOREX Transactions
 On transaction date your sale is P78,000.00.
 By the year end, you will incur a loss of P5,000.00 because
Y1:.73 but on the invoice date Y1:.78.
 On the settlement date (Jan 22, 2016), you will incur an
additional loss of 500 because exchange spot rate is Y1:.725
which is lower than Y1:.73.
 FOREIGN EXCHANGE
TRANSACTIONS
Forward contract is an agreement between a
buyer and seller that requires the delivery of
same commodity at a specified future date at
a price agreed today.
 FOREIGN EXCHANGE
TRANSACTIONS
Forward contract Transactions
 On Oct. 17, 2017, Shirley Ireneo Co. purchased from a Thailand firm an
inventory costong 10,000 baht. Payment is due on Jan. 15, 2018. Also on
Oct. 17, Shirley Ireneo Co. entered into a foreign exchange forward to
buy 10,000 baht on Jan. 15, 2018.

10,17,17 12/31/17 1/15/18

Spot Rate 1.30 1.42 1.40
Forward Rate 1.36 1.43 1.40
 FOREIGN EXCHANGE
TRANSACTIONS
Forward contract Transactions
Hedging Instrument
 We only disclose the fair value of the forward contract on Dec. 31, 2017
with an amount of P700.00. P1.43-P1.36=P.07
 ฿10000*.07= P700
 On Jan. 15, 2018 the amount of the forward contract will be P400.00
because P1.40-1.43=P.03
 ฿10000*.03=P300 gain from the transaction.
 P700-P300=P400 liability on the settlement date.
 FOREIGN EXCHANGE
TRANSACTIONS
Forward contract Transactions
Hedged Item
 Spot rate of on 12/31/2017 of P1.42 minus the spot rate on 1/15/2018
(settlement date) P1.40 will result to a P.02 forex gain.
 P.02x10000=P200
 Forward Contract- (P300)
Forex Transaction- P200
(P100)
Conclusion: This will result to a decrease of P100 pesos on your income.
 FOREIGN EXCHANGE
TRANSACTIONS
Option Contract is an agreement between
the buyer and the seller that gives the buyer
the right, but not the obligation to purchase
or sell something to the option seller at a
date in the future at a price agreed to at the
time the option contract is exchanged.
 FOREIGN EXCHANGE
TRANSACTIONS
Option Contract Terminologies
1. Call- is an option to buy
2. Put- is an option to sell
3. Holder-a party having the right to buy or sell
4. Writer-a party granting the holder his right.
 FOREIGN EXCHANGE
TRANSACTIONS
Future Contract is the same thing with
forward contracts except that instead of
being negotiated between two parties, the
contract is a standard one that is sponsored
by an organized exchange.
 FOREIGN EXCHANGE
TRANSACTIONS
Swap is a contract in which two parties
agreed to exchange payments in the future
based on the movement of some agreed-
upon price or rate.