Foreign Exchange Market

 The currency market, commonly referred to as the foreign exchange market, is a marketplace where various individuals from across the world buy and sell various currencies. In the conduct of international trade,  this  market  is  extremely  important.  The  currency  market  benefits  businesses  and  people  by allowing them to buy and sell products and services in foreign currencies and by facilitating a constant flow of capital. The key players in the currency markets, including big multinational banks, corporations, governments, and retail traders, work around-the-clock. Members come to the currency market with various goals in mind, and together they increase the market's efficiency and liquidity. These markets, in large part, are what power the vibrant world economies.

It is interesting that the currency market is a network of international markets rather than a single market exchange. Japanese markets are followed by those in Hong Kong, Singapore, India, Bahrain, Europe, the United Kingdom, the United States, Canada, and Australia, all of which operate according to their respective time zones.

 

Cross-border  trade,  investment,  and  financial  activities  are  significantly  facilitated  by  the  foreign exchange markets. These marketplaces enable companies conducting foreign exchange transactions to change their existing currency or deposit into the desired currency or deposit. Foreign exchange dealers handle the majority of transactions; on an average day, they deal with nearly a trillion dollars' worth of exchanges involving only U.S. dollars. With growing worldwide economic activity, trade, and investment as well as technology that enables real-time information transmission and trading, the significance of foreign exchange markets has expanded.

 

A number of factors may influence foreign exchange rates, including the following cited by Rose (1994):

•     Balance of Payments Position: The foreign currency rate of a nation with a trade imbalance typically experiences downward pressure.

•  Future Currency Value Speculation: When they spot lucrative possibilities, speculators will purchase or sell currencies.

•     Domestic Political and Economic Circumstances: Foreign exchange rates often suffer from deteriorating economic conditions and inflation.

•     Intervention by the Central Bank: To alter the value of their own currency, central banks may buy or sell different currencies.

 

 

Structure of Integrated Treasury

 The front office, mid office, back office, and audit group staff the treasury branch. The front office is made up of the dealers and traders. They are the first point of contact with other market players during their buying and selling transactions (dealers of other banks, brokers and customers). They answer to the chiefs of respective departments. To take advantage of arbitrage chances, they also communicate with one another. The unit in charge of risk monitoring, measurement, and analysis operates independently of the treasury unit and reports directly to the top Management for oversight. This department tracks daily risk exposures, both individually and collectively, and provides risk assessment to the Asset Liability Committee (ALCO). Accounting, settlement, and reconciliation tasks are handled by the back office. To guarantee conformity to internal/regulatory processes and procedures, the audit group independently examines/audits the treasury department's daily operations.

 

Arbitrage opportunities are created by pricing differences across various marketplaces for the same class of assets. For instance, borrowing in US dollars, converting that into BDT, purchasing forward insurance to hedge exchange risk, and invest in BDT might all result in arbitrage benefits. But when financial markets operate effectively, asset values and exchange rates are produced that forbid arbitrage.

 

In Bangladesh, a large number of banks have seized the opportunity to establish their integrated treasury operations, which are supported by infrastructure like the Reuters/Telerate/Bloomberg System, hotlines, Dealing Boards, the Internet, etc., as well as software specifically designed for integrated treasury.

Benefits of Integration

 Integration's  primary  goals  are  to  increase  portfolio  profitability,  risk  mitigation,  and  asset  synergy between banking and trading. Trading assets are retained largely for the purpose of making profits on short-term disparities in prices and yields, while banking assets are held primarily for client relationships, consistent income, and statutory duties and are typically held until maturity. The goal is accomplished through  effective  money  management,  cost-effective  liability  sourcing,  appropriate  transfer  pricing, taking advantage of arbitrage opportunities, online and off-line information sharing between money and forex dealers, single point of contact for customers, efficient MIS, improved internal control, risk minimization, and better regulatory compliance.

 

An integrated treasury serves as a hub for hedging and arbitrage activities. In  order to maintain a proactive profit center, it aims to maximize its currency portfolio and allow for unrestricted transfers of

money between other currencies. Banks with integrated treasuries will have the opportunity to develop multi-currency balance sheets and benefit from strategic positioning as a result of the incremental liberalization of capital account convertibility.

 

 

Nature of Integration

 At first, there is the integration of geography and infrastructure. The domestic treasury unit and the FX trading rooms are combined and housed in the same location. The dealing/trading rooms that engage in the same trading activity are brought under the same policies, hierarchy, technological platform, and accounting system under horizontal integration. With a shared pool of money and contributions, all current and different trading and arbitrage activities are placed under one control through vertical integration. The combined effect of all unit trades on currency funds. The transactions are linked electronically.

 

Independent Forex Role	Independent Investment Role	Integrated Role
Merchant Dealing	Funds Management	ALM
Corporate FX Trading	Liquidity CRR/SLR Management	SWAP Management
Proprietary Trading	SLR / Non-SLR Investments	Overseas Borrowing Investment
Derivatives Dealing	Securities Trading	Arbitrage
	Equities Trading	Derivatives Dealing