Contents I. Introduction 2 II. The structure of the foreign exchange market 1. What is the foreign exchange 3 2. The participants of the foreign exchange markets 3. Instruments of the foreign exchange markets III. Foreign exchange rates 1. Determining foreign exchange rates 2. Supply and Demand for foreign exchange 3. Factors affecting foreign exchange rates 11 IV. Conclusion V. Recommendations VI. Literature used I. Introduction Trade and payments across national borders require that one of the parties to the transaction contract to pay or receive funds in a foreign currency.
At some stage, one party must convert domestic money into foreign money. Moreover, knowledgeable investors based in each country are aware of the opportunities of buying assets or selling debts denominated in foreign currencies when the anticipated returns are higher abroad or when the interest costs are lower.
These investors also must use the foreign exchange market whenever they invest or borrow abroad. I d like to add that the foreign exchange market is the largest market in the world in terms of the volume of transactions. That the volume of foreign exchange trading is many times larger than the volume of international trade and investment reflects that a distinction should be made between transactions that involve only banks and those that involve banks, individuals, and firms involved in international trade and investment.
The phenomenal explosion of activity and interest in foreign exchange markets reflects in large measure a desire for self-preservation by businesses, governments, and individuals. As the international financial system has moved increasingly toward freely floating exchange rates, currency prices have become significantly more volatile. The risks of buying and selling dollars and other currencies have increased markedly in recent years.
Moreover, fluctuations in the prices of foreign currencies affect domestic economic conditions, international investment, and the success or failure of government economic policies. Governments, businesses, and individuals involved in international affairs find it is more important today than ever before to understand how foreign currencies are traded and what affects their relative values. In this work, we examine the structure, instruments, and price-determining forces of the worlds currency markets.
II. The structure of the foreign exchange market 1.
Trading among the residents of different countries requires an efficie... The funds available as foreign exchange include foreign coin and curre... Since exchange rates are the vehicle that translates prices measured i... dollars arises from the reverse of these transactions. Many newspapers... These rates refer to trading among banks, the primary marketplace for ...
In their broker function, banks compete to obtain buy and sell orders ... Business firms selling their goods in international markets can avoid ... There are also documentary hills, which typically accompany the intern... This is especially true for tourists who require pocket money to pay f... banks receive credit in the form of a deposit denominated in a foreign...
That is, each trader sets a bid buy price and an asked sell price. The dealer makes a profit on the spread between the bid and asked pric... . Immediate delivery is defined as one or two business days for most tra... Determining foreign exchange rates.
goods and services rises as the price of the falls. costs 1 in Britain. Figure 2 To understand better the schedules, several of the factors th... If the exchange rate floats freely, the British pound appreciates agai... Both activities raise the equilibrium exchange rate of the British pou...
Dealers and investors in foreign exchange monitor the currency markets... Moreover, countries with higher real interest rates generally experien... Such transactions reduce the central banks domestic liabilities in the... Individuals who wish to buy goods or securities in a foreign country m... The value of a nations currency in the international markets has long ...