Functions Of Currency Exchange Markets

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1. Explain 4 functions of currency exchange markets. Provide a thorough example (real or hypothetical) of each type of function in action in business.
a. Currency Conversion: is a way to execute a transaction by converting one currency into another. This takes place when you/your company decides to invest in international affairs. When engaging in a foreign investment you must convert your US dollars into the foreign currency when making a sales and the opposite would happen if the country was buying a product from you.
i. For example, Sanofi-Aventis, a French pharmaceutical company, wants to sell a new medication for diabetes to the United States. The American customer wants to pay for the medication in dollars, the American currency,
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The payment date is shortly approaching and Toyota Motors is now concerned about the value of the payment in Japanese yen a month from the payment date, they want to ensure against the possibility that the pesos’ value will fall over that period and receive less money. On December 16th, Toyota Motors establishes a contract with a local bank to exchange the payment in one month at an agreed upon exchange rate specified on December 16th. Now Toyota Motors will know how many yen the payment will be worth on January 16th.
c. Currency Arbitrage: is the instantaneous purchase and sale of a currency in different markets for profit. This type of currency exchange market is frequently used by experienced traders in foreign exchange markets, along with large investors. Using this type of exchange market maximizes oyur profits and allows you to evaluate three currencies at a time and brings the market into an equilibrium.
i. For example, as you are investing in the New York Stock exchange you notice that the Malaysian ringgit is lower in Greece than it is in New York. As a trader you can buy riggits in Greece, sell them in New York, and earn a profit on the spread. Now the process of this trade is not worth making if the spread between the value of the riggit, the value in Greece and the value in New York is not greater than the cost of conducting the transaction. ii. Interest Arbitrage: is a profit motivated purchase and sale of interest-paying securities
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