Discussion Question

Discussion Question
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The foreign exchange market is a trading market that involves exchanging of any pair of currency. The participant in the foreign exchange markets buy, exchange, sell and speculate on the currency. The foreign exchange market is composed of commercial companies, central banks, investors, investment management firms, retail forex brokers and hedge funds. Foreign exchange market is the largest financial market globally (Gaspar, Kolari, Hise, Bierman, & Smith, 2016). The operations in this market run for 24 hours around the world and the rates of exchange are guided by inflation rate differential, demand, and supply, the balance of trade/balance of payment and interest rate among many others. There are such factors that enable participants to observe fluctuations in the exchange rate in this market. The transactions of foreign exchange are entered with specific date values. The transactions may be outright transactions sale or purchase either for forward or spot value. Swap transactions are also popular in this market.
On the other hand, the Reserve Bank carries out the transaction in the domestic market. Reserve banks do this to ensure that the monetary operational target and the cash rate are close to the target rate set by the board of the reserve bank. The cash rate in this market is the interest rate on unsecured loans between banks. Transactions in this market are undertaken to provide the payment system with liquidity and to manage financial risks.

The supply and demand determine the cash rate for the ES (exchange settlement) funds. A number of financial instructions hold the SE funds in accounts in the Reserve Banks. The funds are used by the account holder in settlements of obligations. In the open market operation, the Reserve Bank controls the supply of exchange settlement funds. On buying securities the Reserve Bank pay for the securities by crediting its counterparty exchange settlement account thus, adds to the overall ES funds supply (Elango, 2007). The reverse is true for securities sales.
The rate of foreign exchange offers one of the most significant means through which a relative country level of economic health can be determined. Economic conditions affect prices charged in foreign markets in that any change in the market inflation triggers changes in the currency exchange rate. For instance when a country has a low inflation rate the value of its currency appreciates. Where inflation is low the prices of services and goods increases at a slower rate (Van Horne, 2001). Besides, changes in interest rate also affect the currency value. A country’s currency appreciates with an increase in interest rate this because higher rates of interest imply that lenders are provided with higher rates thus, attracting more foreign money and this causes an increase in exchange rates.
Other economic conditions that affect prices charged in foreign markets include government debt. If a country has government debt there is low likelihood of acquiring foreign capital and this leads to inflation. If government debt is predicted in a particular country foreign investors sell their bonds on open market. This results in decreases in its exchange rate. International trade also affects prices charged in foreign market the balance of trends and trade levels between countries serves as a proxy for the relative demand of goods and services from a given country. For instance country’s services and products that are in high demand internationally its currency appreciates. A good example would be, for buyers to purchase goods from Australia they must convert money into AUD to facilitate the purchase. By so doing the increased demand for the Australian dollars will put increased pressure on AUD.
References
Elango, B. (2007). Are franchisors with international operations different from those who are domestic market-oriented?. Journal of Small Business Management, 45(2), 179-193.
Gaspar, J., Kolari, J., Hise, R., Bierman, L., & Smith, L. M. (2016). Introduction to global business: Understanding the international environment & global business functions. Nelson Education.
Van Horne, J. C. (2001). Financial market rates and flows. Prentice Hall.