Foreign Exchange Markets Summary

1109 WordsOct 21, 20085 Pages
Foreign Exchange Markets Summary Functions of the world’s major foreign currency exchange markets: this is where money from one country exchanges money for that of another country. It is called the FOREX. FOREX sets the standards for the transfer of money between different countries. It also is the mechanism by which credit is obtained and provided for international trade. It also makes sure that exchange rate risk is minimized. The transfer of purchase power is important due to transactions that involve two countries that have a different currency and they want to make a transaction in their currency. Goods being moved from one country to another takes time so the inventory being transferred has to be financed. A line of credit is provided by the FOREX. It consists of a specialization instrument of letters of credit. The FOREX finds a facility that is more than willing to take the risk for the transfer of foreign exchange. ”The FOREX market consists of two tiers, the interbank or wholesale market, and the client or retail market Five broad categories of participants operate within these two tiers Bank and non bank foreign exchange dealers Individuals and firms conducting commercial or investment transactions Speculators and arbitragers Central banks and treasuries Foreign exchange brokers” according to Guide to the Best Forex Resources. Advantages of a virtual foreign exchange market are as follows. A payment balance tends to be due in the change of the exchange rate. This is due to the fact that imports is greater than exports and this drives the pounds value down. Depreciation should be made to make exported products cheaper and imported products higher priced, thus an increase of demand for goods from abroad and a reduction in demand of foreign items. This should eliminate the appreciation of currency.

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