Problems And Prospects Of The Foreign Exchange Market In A Developed Economy
(A Survey Of United Bank Of Africa And Intercontinental Bank Plc))
In a developed economy, the foreign exchange market faces various challenges and opportunities. One prominent issue is the volatility stemming from global economic uncertainties, geopolitical tensions, and shifts in monetary policies. This volatility can impact businesses’ planning and investment decisions, leading to increased risk exposure. Additionally, regulatory changes and compliance requirements pose challenges for market participants, influencing trading strategies and operational costs. However, the developed economy’s robust infrastructure, advanced technology, and skilled workforce provide prospects for innovation and efficiency in foreign exchange trading. Market participants can leverage sophisticated trading platforms, algorithmic trading strategies, and data analytics to optimize their operations and mitigate risks. Furthermore, the integration of the foreign exchange market with other financial markets offers opportunities for diversification and portfolio management. Despite these prospects, maintaining stability and resilience in the face of external shocks remains a continual concern for policymakers and market participants alike, necessitating ongoing monitoring and adaptation to dynamic market conditions.
This project work is designed to evaluate the problems and prospects of the foreign exchange market in a developed economy with particular emphasis on United Bank of Africa and intercontinental Bank, plc both in Owerri Imo State, Nigeria.
This project will be designed to show in details how these problems affect operation in the market. This work is achieved after evaluating my five chapters aimed at looking at the problems and prospects of the foreign exchange market in a developed economy.
Chapter one deals on the general introduction of the research work which includes the statement of the problems, the research questions, hypothesis and purpose of the study. The significance of the study, the scope limitation and operational definition of terms were also treated in this chapter.
Chapter two centers on the review of related literature and opinions of professionals and experts on the subject matter which include the following headings: foreign exchange, the objective of the market, an overview of the Nigeria foreign exchange market, sources of found in the market, the market instruments and operations, the regulatory institutions and their functions management of the Nigeria foreign exchange market, sources of the foreign exchange in Nigeria, problem and causes prospects of the market.
Contents pages
Title page i
Approval page ii
Dedication iii
Acknowledgement iv
Abstract v
Table of content vi-viii
CHAPTER ONE
1.0 INTRODUCTION 1
1.1 General overview 1-2
1.2 Statement of problems 2-3
1.3 Objective of the study 3-4
1.4 Significance of the study 4-5
1.5 Research questions 5
1.6 Formulation of hypothesis 5-6
1.7 Scope of the study 6
1.8 Limitations of the study 7-8
1.9 Operational definitions of terms 8-9
CHAPTER TWO
2.0 REVIEW OF RELATED LITERATURE 10
2.1 Foreign exchange 10-11
2.2 Foreign exchange market 11-12
2.3 Objectives of the foreign exchange market 12-13
2.4 Overview of the Nigeria foreign exchange market 13-14
2.5 Sources of funds in the Nigeria foreign exchange market 15
2.6 The market instruments 15-16
2.7 The market operations 16-18
2.8 The regulatory institutions and their functions 18-20
2.9 Management of the Nigerian foreign exchange market 20-23
2.10 Exchange rate determinants in the foreign exchange market 24-28
2.11 Sources of foreign exchange in Nigeria 28
2.12 Problems of the foreign exchange market 29-31
2.13 Causes of the problems of the foreign exchange market 32-33
2.14 The prospects of the foreign exchange market 33-34
CHAPTER THREE
3.0 RESEARCH METHODOLOGY 35
3.1 Research design 35
3.2 Questionnaire design 36
3.3 Sources of data 36
3.3.1 Primary sources 37
3.3.2 Secondary sources 37
3.4 Method of data collection 37
3.4.1 Interview 38
3.4.2 Questionnaire 38
3.5 Population of the study 38-39
3.6 Sampling method 39-40
3.7 Determination of sample size 40-41
3.8 Method of questionnaire distribution 41-42
3.9 Method of data analysis 42-43
CHAPTER FOUR
4.0 DATA PRESENTATION, ANALYSIS AND
INTERPRETATION 44
4.1 Analysis of responses 45-57
4.2 Test of hypothesis 57-60
4.3 Discussion of findings 60-62
CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND RECOMMENDATION 63
5.1 Summary 63-64
5.2 Conclusion 64-65
5.3 Recommendation 66-68
5.4 Suggestion for further studies 68
Bibliography 69-71
Appendix 72-76
INTRODUCTION
1.1 GENERAL OVERVIEW
The foreign exchange market is en extricable linked with both segments of the markets. This is particularly striking in the money market where the determination of foreign exchange and money markets rates are linked through interest rates.
Dealing in the foreign exchange market in Nigeria were centralized in the central bank of Nigeria. When it was established, and the determination of the exchange rate was based on local market conditions and the performance of the naira vis-à-vis the weight basket of Nigeria major trading partner currencies. Since the deregulation of the market in 1986, the exchange rate of the domestic currency has been determined mainly by market forces, except for few episodes of visible hand of administrative management of the exchange rate currently the market consist of the central bark and authorized foreign exchange dealers and the burean de change operators.
In general there is need to do an in-depth study of the foreign exchange market so as to assess the problems and prospects of the market using a survey of UNITED bank of Africa and the intercontinental bank.
1.2 STATEMENT OF THE PROBLEM
The problems associated with the foreign exchange market in a developed economy have caused a lot of harms and impediments to the economic growth and developed of the market. The problems associated with the market can be analyzed under two subheadings, internal and external problems. The internal problems are as follows;
Organizational structure: This has to do with a situation whereby one without the experience needed is made to head the foreign operations unit of the banks.
Lack of modern facility and equipments: This is a situation whereby the modern facility and equipment needed to facilitate the operations of the banks in the market is lacking.
Economic instability or problem: This has to do with the dividing nature of the economy that effects the activities of the market .
Unreliable communication network: this has to do with the communication between the banks and the market that is likely to trip off at anytime. Thereby causing system breakdown. This could also be traced to poor infrastructural facilities in the country.
The external problems are as follows
a. Excess demand pressure on the market making demand more than supply.
b. Round tripping that is diverting the foreign exchange to the parallel (black) market.
c. Unethical practices and sharp practice of official and authorized dealers.
d. Exchange rate volatility
1.3 OBJECTIVE OF THE STUDY
1. To find out the problems and prospects of the foreign exchange market
2. To find out how these problems have limited the operations of the foreign exchange market.
3. To sought ways of eliminating or reducing these problems
4. To find out if the prospects of the market would lead to the development of the market and also help in reducing the problems of the market.
5. To make recommendation on how to solve the problems associated with the market and ensuring that the prospect of the market are attained.
1.4 SIGNIFICANCE OF THE STUDY
Researcher: This study or research work would enable the researcher in the partial fulfillment of the requirement for the award of the higher national diploma (HND) in purchasing and supply also acquire basic knowledge and experience needed in research study.
Other Students: This research work would serve as a data bank for other students who are studying international purchasing and other related courses to have an in-depth knowledge of the foreign exchange market.
The Firm: This work would create a kind of awareness in the problems which are encountered in the foreign exchange market also recommend ways of reducing or eliminating them.
The Market: This work would create a kind of awareness in the market at large and also point out the problems in the market, notifying the market of the causes and the prospect of the market.
1.5 RESEARCH QUESTIONS
a. What are the causes of the problems in the foreign exchange market?
b. How can improvement in the infrastructural such as information or telecommunication networking led to efficiency of operations in the foreign exchange market?
c. To what extent can reduced dependency on importation reduce excessive demand pressure on the foreign exchange market?
d. How can rate stability affect the foreign exchange market?
e. To what extent can harmonization of monetary and fiscal policy enhance the operations of the foreign exchange market?
1.6 FORMULATION OF HYPOTHESIS
Giving direction to the study, the following hypothesis have been formulated.
Ho: There are no problems in the foreign exchange market in a developed economy
Hi: There are problems in the foreign exchange market in a developed economy.
Ho: There are no means of resolving these problems
Hi: There are means of resolving these problems
Ho: The foreign exchange market has no prospects
Ho: The foreign exchange market has prospects
1.7 SCOPE OF THE STUDY
The research study focuses its attention on the foreign operations units and international transactions staff and head of unit of the united bank of Africa and the intercontinental bank plc as a survey. This research work is supposed to cover the entire foreign exchange market but due to some constraint, it is limited to the two above mentioned banks.
The researcher work would look into the general problem and prospect that hinder the operations of these banks in the foreign exchange market. It will use a statistical tool to seek for this research choosing a time dimension of twenty years between 1985-2005.
1.8 LIMITATION OF THE STUDY
Financial Constraints: This here to do with the unavailability of finance to carryout the researcher this made the success of the research study to be quiet difficult.
Time Factor: This is the required time and available time to carryout this study on a wider scope.
Repatriation: This is an agreement between the countries enables companies to repatriate their profit.
Smuggling: This is a process of bring in goods secretly and illegally into or out of a country e.g. drug smuggling.
Unethical: A situation whereby things, behaviour are not done well or not morally accepted.
Devaluation: To give lower value to something like money etc.
Unavailability: Not able or not willing to see, to meet up once responsibility.
Lack of Basic Materials: A research study to this nature requires a lot of materials to carryout the research but as a result of the absence of these materials, the researcher was restricted to only these available.
Non-Cooperation of Personnel: Some of the personnel where not eager to give out information that would enrich the research study.
Inconveniencies: These have to do with the inconveniencies of traveling to the location of the case study.
1.9 OPERATIONAL DEFINITION OF TERMS
Accede: To agree to a demand after disagreeing
Administration: Connected with the work of managing or organizing a company.
Asymmetry: Having two sides that all of different shapes
Authorized: To give official or legal permission
Currencies: Type of money that a particular country uses
Depreciation: To decrease in value or price.
Deregulation: To remove government rules and controls from some business activities.
Dwindled: To gradually become less.
Exchange: Giving one thing for another
Emergence: To become known
Financial market: A forum for the exchange of financial products
Harmonization: Two things working well together
Management: The skill of directing
Money market: A market where long and shorter terms fund are bought and sold
Operators: To use and control something
Prospects: A possibility that something or chances of future success of something
Skewed: Incorrect piece of information or result.
Sophisticated: Having a lot of experience on the world and knowing about fashion culture and other things that people think are socially important.
Promissory Note: It is a way or promise to pay issued and drawn up by a buyer (i.e. the author of the document) in favour of the seller (i.e. the payee or beneficiary .
Importation: This is process of bringing in a product, a service, an idea etc into one country from another.
Problems And Prospects Of The Foreign Exchange Market In A Developed Economy:
The foreign exchange (forex or FX) market in a developed economy presents a unique set of challenges and opportunities. Here, we’ll discuss some of the problems and prospects associated with the foreign exchange market in such an economy:
Problems:
Exchange Rate Volatility: In a developed economy, exchange rates can be highly volatile due to various factors like economic data releases, geopolitical events, and market sentiment. This volatility can create uncertainty for businesses engaged in international trade.
Speculation and Manipulation: Developed economies often attract speculative trading, which can lead to short-term fluctuations that do not reflect underlying economic fundamentals. This speculative behavior can disrupt the stability of exchange rates.
Liquidity Issues: While developed economies generally have deep and liquid forex markets, there can be liquidity issues during certain times, especially in less commonly traded currency pairs. This can result in wider spreads and higher transaction costs.
Interest Rate Differentials: Developed economies tend to have varying interest rates, and the carry trade, which involves borrowing in a low-interest-rate currency and investing in a high-interest-rate currency, can cause exchange rate movements that are disconnected from economic fundamentals.
Regulatory Challenges: Regulatory authorities in developed economies often face the challenge of balancing the need for market stability with the desire to promote financial innovation. Striking the right balance is crucial to prevent market abuses and ensure fair and transparent trading practices.
Prospects:
Hedging Opportunities: Developed economies provide advanced financial instruments that allow businesses to hedge against exchange rate risk. This helps companies engaged in international trade manage their exposure to currency fluctuations.
Global Investment: Developed economies attract foreign capital due to their stability and attractive investment opportunities. This can lead to a strong demand for their currency, supporting its value in the forex market.
Market Efficiency: The forex market in developed economies is generally efficient, which means that exchange rates tend to reflect available information and fundamentals accurately. This efficiency can benefit traders and investors.
Financial Innovation: Developed economies often lead in financial innovation, which can lead to the development of sophisticated forex products and platforms that enhance market access and efficiency.
Diversification: Investors and businesses in developed economies have access to a wide range of currency pairs and financial products, allowing for diversification of risk and investment opportunities.
Information Flow: Developed economies have robust financial news and data infrastructure, ensuring that market participants have access to timely and reliable information that can guide their trading decisions.
In conclusion, the foreign exchange market in a developed economy offers both challenges and prospects. While exchange rate volatility and speculative behavior can be problematic, the presence of advanced financial instruments, liquidity, and market efficiency provide opportunities for businesses and investors to manage risks and make informed decisions. Effective regulation and oversight are crucial to ensure the market’s stability and integrity.