Foreign Exchange Markets

1
Foreign Exchange Markets

• The Foreign Exchange Market is the generic term
  for the worldwide institutions that exist to
  exchange or trade the currencies of different
  countries

2
Functions of FXMs

• Clearing
• the act of helping international traders to end
  up with the kind of currency they prefer
• Hedging
• the act of reducing or eliminating a net asset or
  a net liability position in a foreign currency
  and
• Speculating
• the act of taking a net asset position (long) or
  a net liability (short) position in a foreign
  currency

3
Exchange Rate

• An exchange rate is the price of one money in
  terms of another. Exchange rate is expressed in
  terms of the number of units of a currency
  required to purchase a unit of another currency.

4
Balanced Trade

• Goods, services and assets move internationally
  from exporters to importers
• Payments move domestically from importers to
  exporters
• The FXMs holdings of each countrys currency are
  unchanged and
• Residents holdings of the domestic currency are
  unchanged.

5
Trade Imbalance

• Goods, services and assets move internationally
  from exporters to importers
• Payments move domestically from importers to
  exporters
• The FXMs holdings of each currency change
• Residents holdings of domestic currency change