Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Foreign exchange trading Foreign exchange trading ever stop during working hours the world is still open. Twenty four hours a day, Monday through Friday. The world's financial centers integrate together to form the world's foreign exchange market. Integration between world financial centers is supported by communication network technology that is able to provide facilities for the implementation of trade quickly and efficiently. Foreign currency turnoverworld for one day is estimated to reach a value of 3.21 trillion US dollars with three types of transactions. As shown in the Table below. Swap transactions were the largest, accounting for 53.4 percent of total transactions, while spot transactions reached 1,005 billion of US$3.21 trillion or 31.31 percent of total transactions. Foreign Exchange Trading Spot Transactions. A spot transaction is the purchase or sale of foreign currency at the exchange rate prevailing on the spot market. Exchange rates on the spot market are determined by the supply and demand for foreign currencies on the interbank market. Transactions are based on a contract agreed upon by both parties. One party offers a beneficiary an amount of currency in exchange for an amount of another currency at a spot rate agreed on the spot. The spot market or spot market is a market that facilitates buying and selling foreign currencies in cash with the transfer of funds made immediately after the transaction is agreed upon. The spot market is usually called the actual market or the physical market. The spot market can also be interpreted as the local foreign exchange market. For example the Jakarta spot market, foreign currency trading conducted between banks in Jakarta, with the Jakarta spot rate or spot rate. Instructions for handing over the funds or currency thereof are in the form of a check issued by a bank and can be cashed or cashed within one or two business days. The following is a description or example of a transaction on the spot market. Quoutation data for USD/IDR at Bank X in the city of Jakarta is shown in Table. Spot Transaction Rate Customers need USD 10,000 in US Dollars to pay for international transactions. If the customer agrees with the quotation offered, then the transaction can be made. In this transaction the customer will buy US Dollars by paying in Indonesian Rupiah. Then the quotation used is the USD/IDR selling rate. The customer submits Indonesian Rupiah to Bank X in the amount of: USD 10,000 x IDR 12,100/USD = IDR 121,000,000. Bank X must submit USD 10,000 to the customer no later than two days or (2 x 24 hours) after the transaction is made. Transactions for profit by utilizing exchange rate movements are known as trading. Some people call transactions in foreign currency trading a speculative act. Profits or losses obtained from trading are largely determined by how accurately customers can predict future exchange rate movements. For example, a customer predicts that the USD/IDR rate will strengthen in the next few weeks. Strengthening means the US Dollar is rising, or the Indonesian Rupiah is falling. The current rates are shown as in Table 3.9. The customer comes to Bank X and agrees with the spot rate, then buys USD/IDR at the USD/IDR selling rate of 12,100. After one week the rate changes to: USD/IDR 12,300 – 12,400 In this case, the USD/IDR exchange rate strengthened. Then the customer goes to Bank X to sell USD/IDR at a USD/IDR buying rate of 12,300. From buying and selling transactions of USD/IDR customers get exchange differences: at the time of the purchase transaction, the USD/IDR selling rate was 12,100 at the time of the sell transaction, the USD/IDR buy rate was 12,300 the exchange difference of the two transactions is: USD/IDR 12,300 – USD/IDR 12,100 = USD/IDR 200 or 200 points. This means that customers get a profit of IDR 200 per US Dollar purchased. If at the time of the transaction the customer buys USD 1000, then the profit will be: Profit = USD 1,000 x IDR 200/USD = IDR 200,000 In fact, the profit potential from transactions in trading is not limited as long as the exchange rate movements are in accordance with the customer's predictions, namely moving up and down. Meanwhile, the potential loss will be limited to a maximum of USD 1000, which is when the USD/IDR rate drops to zero. Forward Transactions. Forward transactions are buying and selling transactions of foreign currency at the forward rate determined when the transaction is made. Forward rates are valid for future periods between 2×24 hours to one year. This means that the delivery of funds or currency will be made in the future. The forward rate is calculated based on the spot rate and the difference in interest rates between the two currencies being traded. Thus the forward rate can be higher or lower than the spot rate. The forward rate is calculated based on the following formula: Forward Rate = (Spot Rate) + (r1 – r2) x (n/360) x (Spot Rate) r1 = currency interest rate 1, for example IDR r2 = currency interest rate 2, for example USD n = days for n/360, or n = months for n/12 An example of calculating the exchange rate on a forward transaction for the next three months, USD/IDR Spot Rate 11900–2000 IDR interest rate 3 months = 14% per year. interest rate USD 3 months = 4% per year. Forward Rate = 12,000 + ( 14 % – 4 %) x (3/12) x 12,000 = 12,000 + 300 = 12,300 or, Forward RateUSD/IDR 12,300 From the calculation results, it is found that the forward rate is higher than the spot rate. Transactions for forward contracts that use a forward rate agreement higher than the spot rate are called forward premiums, while contracts with a forward rate lower than the spot rate are called forward discounts. Forward transaction example: The customer has just received a short term, three months loan of USD 1,000. The loan repayment maturity is three months in the future. The loan money will be used to pay for purchases of imported goods. The customer comes to Bank X to make a three-month forward transaction. With quotation data as follows: USD/IDR Spot Rate 11900–12,000 USD/IDR Forward Rate 12,198–12,300 If the customer agrees with the quotation offered by Bank X, then the transaction can be made and the transaction contract validity period is three months. This means that the currency will be delivered in the next three months. The customer will buy US Dollars by paying in Indonesian Rupiah at the forward selling rate, namely: USD/IDR 12,300. This means that when the forward contract matures, three months later, the customer must submit Indonesian Rupiah to Bank X in the amount of: USD 1000 x IDR 12,300/USD = IDR 12,300,000, and Bank X must hand over USD 1000 to the customer. In this case, regardless of the USD/IDR exchange rate at the time the forward contract matures, the customer will only buy US Dollars at the USD/IDR exchange rate of 12,300. In this case the customer will be protected from losses due to fluctuating exchange rates. Swap Transactions. A swap transaction is a contract to buy or sell foreign currency at the currently agreed exchange rate according to the spot rate and combined with a purchase or sale transaction of foreign currency at a forward rate. Here two transactions are carried out at once. For example, making a sale transaction of a foreign currency at the spot rate (spot transaction), accompanied by a purchase of foreign currency for a future time (forward transaction). Buying and selling transactions are carried out at the same bank.