Professional Documents
Culture Documents
Central Banks
The central bank is an important participant in the organization of the exchange
market. They work as the custodian of the foreign exchange of the country. The
central bank plays an important role in the foreign exchange market. Its main
function is to prevent the aggressive fluctuations in the foreign exchange market. It
does this by selling the currency when it is overvalued and buying it when it is
undervalued.
Broker
The brokers act as a link between the central bank and the commercial bank and
also between the actual buyers and commercial banks. A major source of market
information comes from the brokers. The brokers do not buy the currency for
themselves but instead strike a deal between the buyer and seller on a commission
basis.
Commercial Banks
The second most important organ in the foreign exchange market are the
commercial banks. The Commercial Bank are the market makers as they quote on a
daily basis for buying and selling foreign exchange. The Commercial Banks buy the
foreign currency from the brokers and sell it to the buyers.
Source: http://old.fxstreet.com/education/forex-basics/the-six-forces-of-forex/2006-06-
29.html
Transactional Exposure
Transaction exposure is a kind of risk where cross currency transactions are involved
(international Trade) where multiple currencies come in from various countries. In
other words if a company id dealing with another foreign company where it would
have to make a payment in foreign denomination and the exchange rates fluctuates
before the final settlement then this known as Transactional Exposure.
For example if an Indian company is doing business with a US based company and it
has a receivable of USD 5000 due in five months time but at the same the the
dollar depreciates relative to the Indian rupee the the Indian company will face a
cash loss but on the other hand if it had to payable to the US company then the
Indian company would have made a gain due to the depreciation of the US dollar.
Thus a cross currency contract between the two firms located in different countries
agree for a specific amount of money and goods. However the contract value may
change due to fluctuations in the foreign exchange rate. This risk of change in the
exchange rate is called Transaction Exposure. The time gap associated between the
agreement and the final settlement determines the risk in the foreign exchange
rates. Greater the time gap higher the risk. However companies use hedging
techniques to save themselves from transactional exposure.
Operating exposure
The extent to which a companys future cash flows are affected due to the changes
in the price and most importantly due to the changes in the exchange rate is known
as the operating exposure. In other words an operating exposure is the risk that the
companys revenue is affected due to inflation rate and change in the exchange
rates.
Like transactional exposure, operating exposure also involves the actual or potential
gain or loss, but the transactional exposure deals with particular transactions of the
company while operating exposure deals with the macro level exposure where not
only the company involved gets affected but the whole industry observes change
along with the change in the inflation rate and exchange rates thus the entire
economy is exposed to foreign exchange risk with the operating exposure.
Operating Exposure is difficult to identify as the cash flows largely depend upon the
companys input and the prices of its output which gets altered significantly with
the change in the foreign exchange rates. Operating exposure relates to unseen
challenges from the competitors, entry barriers etc which are subjective in nature
and are interpreted differentially by different experts. Thus, competitive position of
the company is influenced substantially by operating exposure.
Translation Exposure
Translation exposure is also known as accounting exposure. It is the risk arising due
the translation of assets held in foreign currency or abroad changes due to the
movement in the foreign exchange rates. The translation exposure is concerned
with recorded profits and the balance sheet values and does not affect the overall
value of the company. Since the losses or gains due to the translation of financial
items has no significant impact on the stock prices of the company