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

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

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.

Balanced Trade

Goods, services and assets move internationally from exporters to importers;

Payments move domestically from importers to exporters;

The FXM’s holdings of each country’s currency are unchanged; and

Residents holdings of the domestic currency are unchanged.

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