Question
In 2013, $5.3 trillion dollars ($6.6 in 2019) were being traded per day on the Forex Market. The size of the market and the constant
In 2013, $5.3 trillion dollars ($6.6 in 2019) were being traded per day on the Forex Market. The size of the market and the constant fluctuation of currency rates makes this market very attractive to large banks and hedge funds who engage in speculative currency trading. Prior to 2013, regulators believed the size of the market was too big for anyone to be able to artificially rig or fix currency rates. However, in 2015 aFOREX fixing scandal(Links to an external site.)
was uncovered were currency traders of 5 big banks would agree on the trading amounts in a chat room to try and manipulate the exchange rate of the day. While the collusion by traders was illegal, the aggressive buying and selling of currencies in a short window is a common practice, especially given how the exchange rate is determines during the"4 p.m, fix".(Links to an external site.)
Now assume there was increased regulation and limits on speculative trading. As a result, banks, hedge funds and investors would increase their risk exposure and reduce their earning potential. What are some potential consequences to companies engaging in trade that are exposed to changes in the exchange rate (think more risk,higher price)? If you were a regulator, do you think banks, hedge funds and investors should be allowed to unlimited profit as a reward of bearing the risk of volatile exchange rates, or should the risk exposure of banks to the market's volatility increase, limits on profits imposed and the cost for businesses to lower their risk to exchange rates through futures, options and swaps (with banks as intermediaries)go up?
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