1. Explain the purpose for the existence of financial markets 2. Explain the pur
ID: 1166687 • Letter: 1
Question
1. Explain the purpose for the existence of financial markets 2. Explain the purpose for the existence of foreign exchange markets. 3. In the purchase or sale of foreign currency describe the following: i. Bid rate ii. Offer rate iii. Spread 4. List two of the three factors that can influence a large spread between the bid and offer rate. 5. Why do banks need to "square off"' their foreign exchange holdings. To answer this question assume the following: A bank ends up with far more US dollars then is optimal, that are the issues with this position. 6. Define the following terms: Arbitrage and SpeculationExplanation / Answer
1.
The purpose of the existence of the financial market is to provide the platform that facilitates the exchange of funds to purpose of production and investment activities. Here, financial markets bring lenders and borrowers together and supply of funds meet with the demand of the funds. It helps in money creation and economic development takes place.
2.
The purpose of the existence of the foreign exchange market is to provide a market for the exchange of currencies on a real time basis, bring liquidity to the currency and help adjust the currencies w.r.t. its exchange rate with the another currency. Besides, it also provides opportunities to speculate, trade and earn profit for the forex traders.
6.
Arbitrage refers to the getting benefits due to price differentials of a product or financial instruments in different markets. Here, the traders buy product at low price in one market and sell at higher price into another market.
Speculation refers to the trading and or investment activities without verifying the merit of it and going by the market trends. Here, the traders or investors make guess or rely on gut feeling, rather than the sound fundamentals of the company.
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