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Foreign currency forward market is ___________

Foreign currency forward market is ___________

Looking for the answer to the question below related to Ratio Analysis ?

Foreign currency forward market is ___________

 Options:

A. An over the counter unorganized market
B. Organized market without trading
C. Organized listed market
D. Unauthorized listed market

The Correct Answer Is:

  • A. An over the counter unorganized market

The correct answer is A. An over the counter unorganized market.

Here’s a detailed explanation of why the foreign currency forward market is characterized as an over the counter (OTC) unorganized market, along with the reasons why the other options are not correct:

A. An over the counter unorganized market:

The foreign currency forward market is indeed an over the counter (OTC) unorganized market. This means that it operates primarily through decentralized transactions between participants directly, without a centralized exchange.

In the foreign currency forward market, participants enter into agreements to buy or sell a specific amount of one currency for another at a predetermined future date and exchange rate.

These contracts are customized to meet the specific needs of the participants, such as the currency pairs, contract size, and maturity dates. The key characteristics of the foreign currency forward market being OTC and unorganized include:

1. Decentralized Trading:

Participants, such as banks, financial institutions, multinational corporations, and individual traders, engage in bilateral transactions with each other. These transactions are not conducted through a centralized exchange but are negotiated directly between the parties involved.

2. Customization:

Foreign currency forward contracts are highly customizable, allowing participants to tailor the terms to their specific requirements. This flexibility is essential in managing currency risk associated with international trade, investment, and hedging strategies.

3. Lack of Transparency:

Unlike organized listed markets, OTC markets do not provide the same level of transparency. There is no central order book or publicly available pricing information for all market participants. Prices are typically quoted privately between the buyer and seller, making it more challenging to determine the prevailing market rates.

4. Counterparty Risk:

In OTC markets, participants are exposed to counterparty risk, as there is no central clearinghouse to guarantee the performance of contracts. This means that the creditworthiness and reliability of the counterparty become crucial factors in the transaction.

Now, let’s discuss why the other options are not correct:

B. Organized market without trading:

This option is not correct because the foreign currency forward market does involve active trading. While it is not conducted on a centralized exchange like a stock market, participants actively engage in trading foreign currency forward contracts.

These contracts are used for various purposes, such as hedging against currency fluctuations, speculating on exchange rate movements, and managing international business transactions.

C. Organized listed market:

This option is not correct either. The term “organized listed market” typically refers to exchange-traded markets, such as stock exchanges. In these markets, financial instruments are standardized, and transactions occur through a centralized exchange where prices are publicly available.

The foreign currency forward market does not operate in this manner; it is OTC and characterized by customized contracts that are not publicly listed or traded on a centralized exchange.

D. Unauthorized listed market:

The term “unauthorized listed market” is not a common or recognized description in the financial industry. The foreign currency forward market is not characterized by being unauthorized; rather, it is OTC and operates according to the specific terms and agreements between participants.

The key aspect of the foreign currency forward market is its decentralized and customizable nature, not whether it is authorized or unauthorized.

In summary, the foreign currency forward market is an over the counter (OTC) unorganized market, where participants engage in decentralized and customized transactions to manage currency risk. This market is distinct from organized listed markets like stock exchanges and is not characterized as an unauthorized listed market.

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