pdfLecture chapter 8

pdfLecture chapter 8 - MODULE 8 The Foreign Exchange Market...

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1 MODULE 8 – The Foreign Exchange Market Introduction The role of the Foreign Exchange (FX) Market in the international capital market will be elaborated upon in this Module, coupled with an example of how the exchange rate determines the price of commodities. The risks that international bankers are taking in this market will be discussed, especially settlement risk. The role of the central bankers in the FX Market will be elaborated upon. And finally, the role of the Internet in the FX Market will be discussed. Objectives Upon successful completion of this module, the student should be able to: • Identify the role of the FX Market in international trade. • Calculate a simple example of commodity prices in relation to currency values. • List a series of potential risks the FX Market poses to the operation of international banking. • Examine the role of the central bankers in the FX Market. • Examine the role of Eurocurrency in the FX Market. W ith the globalization of economic and financial activity, and advancement in the telecommunication sector, the planet became a neighborhood in a short period of time. International trade, which encompasses economic and financial activity, coupled with the interdependencies in economic resources among nations, requires a payment system that facilitates and brings efficiency to these reciprocities. The FX market facilitates international trade and payment systems among nations by altering their currencies. Nations’ macroeconomic stability is heavily dependent upon the value of their currency in relation to others with whom they trade. Various financial securities are utilized by nations to satisfy debt incurred through international trade or other economic interaction. The rate by which the two currencies are valued is determined by the amount of the currencies exchanged as a result of export and import, transactions in the international bond market, and exchange of goods and services between countries. In the international capital market, the term arbitrage refers to transacting in foreign currencies to take advantage of fluctuations that occur in the value of currencies as a result of macroeconomic instability. For further information, please see Footnote #1 . The various instances in which people use the FX market include traveling to another nation that requires purchasing that country’s currency. If both nations are experiencing economic and financial stability, then the exchange rate between the countries is stable and normal. On the other hand, if either nation is experiencing macroeconomic instability, it can impact the other nation’s economic system through contagion. Like every other market, the FX market is also subject to an equilibrium resulting from how much currency of each nation is supplied and demanded. This equilibrium is determined through trade and tourism, and purchasing and selling financial securities. If the currency value of one nation is superior to another, then its currency is demanded more than the other, and vise-versa.
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pdfLecture chapter 8 - MODULE 8 The Foreign Exchange Market...

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