One of the reasons forex markets
remain as lightly regulated as they are is that no developed nation wants to
impose restrictions on the flow of global capital. International capital is the
lifeblood of the developed economies and the principal factor behind the rapid
rise of developing economies like China, Brazil, Russia, and India. The forex
market is central to the smooth functioning of international debt and equity
markets, allowing investors to easily obtain the currency of the nation they
want to invest in.
Financial investors are the other
main group of nonspeculative players in the forex market. As far as the forex
market is concerned, financial investors are mostly just passing through on
their way to another investment. More often than not, financial investors look
at currencies as an afterthought, because they’re more focused on the ultimate
investment target, be it Japanese equities, German government bonds, or French
real estate.
Crossing borders with mergers and acquisitions
Mergers and acquisitions
(M&A) activity is becoming increasingly international and shows no sign of
abating. International firms are now involved in a global race to gain and
expand market share, and cross-border acquisitions are frequently the easiest
and fastest way to do that.
When a company seeks to buy a foreign
business, there can be a substantial foreign exchange implication from the
trade. When large M&A deals are announced, note the answers to the
following two questions:
- Which countries and which currencies are involved? if a French electrical utility buys an Austrian power company, there are no currency implications because both countries use the euro (EUR). But if a Swiss pharmaceutical company announces a takeover of a Dutch chemical firm, the Swiss company may need to buy EUR and sell Swiss francs (CHF) to pay for the deal.
- How much of the transaction will be in cash? Again, if it's an all stock deal, then there are no forex market implications. But if the cash portion is large, forex markets will take note and begin to speculate on the currency pair involved.
