Friday, September 4, 2009

Instruments of foreign exchange market:cable transfers

There are several financial instruments which are used to facilitate foreign-exchange trading. one of the most important is the cable transfer-an execute order sent by cable to a foreign bank holding a currency seller‘s account. the seller directs the bank to debit the seller‘s account and credit the account of a buyer or someone the buyer designates (such as a commercial bank).
For example, suppose a U.S. export firm has just received payment from one of its overseas customer in francs. The U.S. firm is paid in the form of a deposit denominated in francs residing currently in a bank in Paris. The U.S. exporter cables the Paris bank to transfer the francs to the account of a New York bank, receiving a dollar deposit from the New York bank at the current dollar-franc exchange rate. The export firm now has dollars which can be spent in the United States for raw materials, to meet payrolls, pay taxes, etc., while it's New York bank now owns a deposit in francs which can be loaned out or used for other purposes.
The essential advantage of the cable transfer is speed since the transaction can be carried out the same day or within one or two business days. Business firms selling their goods in international markets can avoid tying up substantial sums of money in foreign exchange by using cable transfers.

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