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Describe the spot market.
The requirement of foreign money during international travels is the most common need especially for the travellers, and for such a requirement spot market is the most suitable avenue. This is also sometimes known as FX spot. A spot market can be described as centre which facilitates immediate exchange of currency, thereby fulfilled a requirement of foreign exchange transactions. The transactions centres are based on spot rate. In particular, the exchange rate is determined based on the range of fluctuations in a recent year. As for example the value of Canadian dollar had a rate of fluctuation between dollar 0.62 dollar 0.8. Based on this range of fluctuation the spot market determines the exchange rate for the particular time of the day, which can then be used to obtain the currency required for the immediate exchange (transaction). The framework of spot market is based on the requirements between demand and supply of currency for international trade (Menkhoff, 2016). Thus the foreign exchange spot transaction, it is a form of agreement to buy one currency against another currency with reference to particular price on a particular date. Hence, for overseas travellers this serve as an immediate requirement to receive foreign currency.
Compare foreign exchange brokers and foreign exchange dealers.
A foreign exchange dealer is it trader who is engaged in buying and selling currencies. As for example the dealer can purchase dollars from any party and can sell them at different exchange rate to another party. The difference between the exchange (buying and selling rate) determines the profit of the dealer. In contrary, a foreign exchange broker is a trader who provides platform to exchange dealers which allows them to buy and sell currencies. Exchange dealers often charge transaction fees in conjunction to the overall market of foreign exchange. The profit of exchange dealers is based on the number of transactions and volume of transaction. One of the most common example of exchange broker is forex which is popular worldwide. Foreign exchange dealers on the other hand can be found in different location as shop or centre facilitating exchange of currencies (Evans, 2018). As an individual and require foreign currency for personal needs, foreign exchange dealers are the best source for the exchange of currencies. In this context, foreign exchange brokers are beneficial for traders, transaction involving high volume of currencies, and business avenues which uses collateral accounts.
Distinguish the terms direct quotes, indirect quotes, and cross-rates.
The quotations used for exchange rate purpose are generally described as direct or indirect quotation. Direct quotation in this context refers to the condition in which one unit of the foreign currency will be evaluated with reference to the domestic currency. In contrary, indirect quotation is the reverse of ever mentioned definition. Here one unit of the domestic currency is evaluated with reference to the foreign currency (Omrane& Hafner, 2015).
In general, the US dollar is considered as universal currency and the exchange rate for foreign currencies are expressed in conjunction to the US dollar. However, it is also possible that the exchange rates can be counted against currency of any other country, which is commonly known as cross rate. In other words, this is also referring to the condition in which the exchange rate between two currencies is determined is determined when neither of the two currencies are official for a particular country in which the quotation for exchange rate is given (Kidwell, 2016). The cross rate term is generally being used by foreign exchange traders in order to refer the currency quotes which do not involve US dollar, irrespective of the country location where the quotation is provided.
Provide an example of a cross-rate calculation, that is, calculate the cross-rate of Argentinean Peso to Euro.
For the cross-rate, first it is required to bid the prices of both currencies involved with reference to the pairing made with USD. The calculation here is easier as the base currency in one pairing and the quote currency in another pairing will be the same, that is the USD (Kidwell, 2016).
In the present case, for determining the cross rate between Arfentinean Peso (ARS) to Euro (EUR), the bid price will be:
ARG/USD = 0.026
USD/EUR=0.88
Thus, the cross rate (ARG/EUR) will be 0.026 x 0.88 = 0.02288
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