International Economics: Visit Prepared by: Sir. KubalyendaVisit 0765-832393 0689-606070 FOREIGN EXCHANGE AND FOREIGN EXCHANGE MARKET Visit (Ctrl + Click) Exchange rate: The price of one currency in terms of another currency The demand for country’s currency relative to the supply of its currency determines the exchange rate Exchange Rate Determination Foreign exchange rate can be measured in two ways The price of foreign currency (say, US$) in terms of domestic currency (say TZ shilling) (commonly used) The price of domestic currency (TZ shilling) in terms of foreign currency (say US $) Exchange rates fluctuate considerably over time; Appreciation, is an increase in the value of a currency Depreciation, Is a decline in the value of the currency Foreign Exchange Market This is where Foreign exchange transactions take place It is a market within which individuals, business firms, governments and banks purchase and sell foreign currency and other debt instruments Market does not refer to specific meeting place, rather mean all locations and situations that enable one country’s currency to be purchased and/or sold for other country’s currencies. Functions of foreign exchange market Enables one country’s currency to be transferred to other countries in their own currencies It brings together parties who want to exchange their currencies and enable them to clear their balances on the basis of the market exchange rates. Participants in the Foreign Exchange Market (NISCCC) NisisiiNon-Bank Financial Institutions IndividualsSpeculators Central Bank Commercial Banks Corporations
International Economics: Visit Prepared by: Sir. KubalyendaVisit 0765-832393 0689-606070 Central Bankis responsible for macroeconomic policies that affect exchange rates. In a managed float exchange rate system. It may buy or sell foreign currency in order to set the price(which is the exchange rate) at a desired level. Commercial Banksare at the center of the foreign exchange market since they bring together those who demand and those who supply foreign currencies thus allow foreign exchange transactions to take place. When a commercial bank does not have its desire amount of foreign currency, it can turn to a foreign exchange broker to purchase additional foreign currency or sell its unwanted surplus. The foreign exchange brokers act as wholesalers of foreign currencies, operating in an interbank market. Non-Bank Financial Institutions, large pension funds and other institutional investors offer Foreign exchange transactions Corporations their operations in various countries frequently make or receive payments in foreign currencies. That is, the international exchange of intermediate goods or final goods and services always involve foreign exchange trading to pay for the activities.