role of banks and foreign exchange in purchasing and selling product 

role of banks and foreign exchange in purchasing and selling product

• Financial institutions, primarily commercial banks play the role of intermediaries from the capital market to businesses
• Banks get money though issuing certificate of deposit (CD) and money market instruments (LOC)
• Commercial banks finance trade between customers and businesses in different locations.
• To facilitate trade and international development, banks coverts foreign currencies.

Banks do not create money but act as intermediaries to move money from capital markets to businesses. The financial institution receives money through deposit accounts and giving a certificate of deposit (CD). They play a significant role in trade finance by issuing a letter of credit (LOC) that indicated deposits of money. Typically, LOC is used by corporate to guarantee loans and allows the financing of goods. To facilitate international trade and growth, foreign currencies must be converted from one currency to another, and this is the role of banks.

• Banks act as a resource in corporate finance when organizations want to borrow money to purchase materials
• Banks play the role of consolidating transaction processes, reporting, and bookkeeping for companies transacting globally.
• Offering miscellaneous banking services like corporate checking accounts are offered by banks to keep foreign trade possible.

Organizations always need to make borrowing to cater to expenses of raw materials, inventory, or payrolls. Banks that have overseas branches, simply process corporate finance by consolidating transaction procedures, report and keep records. Usually, it is easier for an organization to do business in a comfortable language with bankers located nearby to handle global affairs or financial needs. Other role includes offering miscellaneous banking services like checking accounts, currency-specific credit card to keep foreign trade possible. The latter is vital when it comes to elimination of the cost of cross-currency purchasing- done at expensive valuation levels

Exchange rates within Switzerland’s market impact on the US

• Swiss franc plays a considerable role in the global economy, and this means it will affect the behavior of the exchange rate- influencing the import-export trade.
• When the capital flows out of Switzerland due to the booming of the global economy, the foreign exchange rate will drop.
• A rise in the foreign currency exchange rate will make Swiss export less competitive, and this will drive up producer costs.
• The performance of the Swiss economy and import-export trade with the US will be affected by the rise or fall of producer cost.

The economy of Switzerland as the selected country is dependent on external trade, and this makes sit sensitive to the exchange rate with the US dollar. In the year 2016, for example, export from the US to Switzerland amounted $ 22 billion while import was $37 billion.  As such, the US is the top destination for Swiss business and is the largest foreign investor. In that way, the fortune of the market in Switzerland is significant for the US import-export transactions. The fortune depends heavily on Swiss franc’ current exchange rate in that a rising rate will make export for Swiss less competitive and induce producer cost. A fall in the exchange rate will make the export more competitive and lower producer costs.

Protecting from future changes in exchange rates

• I recommend the forward market approach.
• The forward market is an over-the-counter marketplace that sets prices of assets for future delivery.
• The company can carry out an interbank forward exchange market.
• Another approach is the use of currency futures contracts.

Ideally, currency future is traded contracts that define the price of one currency and specify that which another currency can be bought or sold in the future. The approach is a legally binding counterparty to hold contracts on expiration dates and deliver currency amount at notable price delivery. The approach is used to hedge currency risk as well as speculate price movements. Similarly, the forward market can be applied for hedging or speculations. The approach is executed between financial institutions and customers.

• Another recommendable approach is looking for high-interest rates.
• The company can consider buying undervalued currencies.
• Also, Target can short an overvalued currency.

Protecting yourself from foreign currency risk may require one to shot the currency exposed to. Currency trade in pairs and this will need the company to buy another for the shorting to work. When speculating that euro would depreciate fork instance, the company can sell Swiss currency and buy the US dollar. Once euro fall, then corporate buys its back or vice versa. Just like an organization may buy undervalued stock, undervalued currencies too can apply. The first thing to do is to observe the country’s current account deficit n terms of the import-export gap. Also, Target can buy currency whose interest rate is high than that of the US.