A: You said on the phone yesterday that you had some questions about foreign exchange dealing.
B: Yes. With the growth of global trade, Chinese companies need foreign currencies for international transactions. So, I'd like to learn more about this topic
I want to know more about this topic.
I'd like to know more about this topic.
A: What's the definition of exchange rate?
B:The exchange rate is the value of one unit of a foreign currency expressed in another currency.
What's the exchange rate?
The price of one currency in terms of another is called the exchange rate.
A: But how are foreign exchange rates determined?
B: This rate fluctuates according to the dictates of supply and demand, within the limitations imposed by national and international monetary authorities.
A: Well, do central bank interventions and exchange controls affect rates of exchange?
B: Yes, of course. But there are still other factors which affect the rates of exchange balance of payments, rates of domestic inflation and the relative purchasing power of currencies, international interests, rate differential and other factors. These factors always work together to affect the rates of exchange.
A: Mr. Steward, what is spot rates?
B: Currencies can be bought or sold in foreign exchange market either for immediate delivery or for delivery later. So the spot rate is tor immediate
A: Does the forward market help?
B: Yes. The forward market is very useful for companies:
A: What can I do for you?
B: I have got something to consult with you. Our company is going to purchase 50,000 tons of com from America on August 20th and the CIF is 15,000 American dollars per ton. 40,000 of the consignment have been ordered by a feed processing plant and a corn starch plant, but we have not yet found a buyer for the rest. The problem is that the cargo will not arrive here from America until 45 days after the purchasing time.
A: And you are afraid that if the com price drops in 45 days, you will suffer a loss in selling the remaining 10,000 tons of corn,
A: Yes. I heard there is a method against the risk on the futures market,
B: Yes. We call hedging. There are several kinds of hedging and anticipatory hedging just suits your situation.
A: How should I do the hedging?
B: When you buy the corn from the cash market, you can sell short a futures contract of the same amount com on the futures market in anticipation of the com prices falling.
A: Is that what is called taking a position' selling a parcel for forward delivery but waiting for the price to go down before actual buying.
B: Yes. The opposite action is called "buying long. When 45 days later, on October 1st, if com price actually goes down, say, to 13,000 American dollars per ton, you will get a profit of 2,000 American dollars per ton on the futures market. This wiII make up your loss on the cash market. In this way you can successfully control your risk on the foreign trade.
A: I see