chap2 - “Foreign exchange” refers to money denomi-...

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Unformatted text preview: “Foreign exchange” refers to money denomi- nated in the currency of another nation or group of nations. Any person who exchanges money denominated in his own nation’s currency for money denominated in another nation’s currency acquires foreign exchange. That holds true whether the amount of the transaction is equal to a few dollars or to billions of dollars; whether the person involved is a tourist cashing a traveler’s check in a restaurant abroad or an investor exchanging hundreds of millions of dollars for the acquisition of a foreign company; and whether the form of money being acquired is foreign currency notes, foreign currency- denominated bank deposits, or other short- term claims denominated in foreign currency. A foreign exchange transaction is still a shift of funds, or short-term financial claims, from one country and currency to another. Thus, within the United States, any money denominated in any currency other than the U.S. dollar is, broadly speaking, “foreign exchange.” Foreign exchange can be cash, funds available on credit cards and debit cards, traveler’s checks, bank deposits, or other short-term claims. It is still “foreign exchange” if it is a short-term negotiable financial claim denominated in a currency other than the U.S.dollar. But,in the foreign exchange market described in this book—the international network of major foreign exchange dealers engaged in high-volume trading around the world—foreign exchange transactions almost always take the form of an exchange of bank deposits of different national currency denominations. If one bank agrees to sell dollars for Deutsche marks to another bank, there will be an exchange between the two parties of a dollar bank deposit for a DEM bank deposit. In this book, “foreign exchange” means a bank balance denominated in a foreign (non-U.S. dollar) currency . Almost every nation has its own national currency or monetary unit—its dollar, its peso, its rupee—used for making and receiving payments within its own borders. But foreign currencies are usually needed for payments across national borders. Thus, in any nation whose residents conduct business abroad or engage in financial transactions with persons in other countries, there must be a mechanism for providing access to foreign currencies, so that payments can be made in a form acceptable to foreigners. In other words, there is need for “foreign exchange” transactions—exchanges of one currency for another. The exchange rate is a price —the number of units of one nation’s currency that must be surrendered in order to acquire one unit of another nation’s currency. There are scores of “exchange rates” for the U.S. dollar. In the spot market, there is an exchange rate for every other national currency 9 ● The Foreign Exchange Market in the United States some basic concepts: foreign exchange, the foreign exchange rate, payment and settlement systems ALL ABOUT......
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This note was uploaded on 04/06/2012 for the course ECON 202 taught by Professor Sanjeev during the Spring '12 term at Indian Institute Of Management, Ahmedabad.

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chap2 - “Foreign exchange” refers to money denomi-...

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