India and other emerging market countries would

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India, and other emerging market countries would dramatically boost world trade and thereby affect countries’ BOP accounts in the years ahead.The Foreign Exchange Market
There are almost 200 countries in the world, most of which are engaged in international trade, and about 150 different currencies that are used to make international payments for goods and services. Due to the central role of currencies in payments, we next turn our attention to the marketplace for buying and selling currencies.The exchange of currencies takes place in foreign exchange markets(often referred to as forex), which consists of a network of international banks (who work with exporters and importers) and currency traders (who buy, sell, and speculate in currencies). Over $1.5 trillion dollars worth of currencies are traded daily. The three largest foreign exchange markets are in London, New York, and Tokyo followed by Hong Kong, Singapore, andBahrain. Each of these centers caters to the foreign exchange needs of certain regions of the world. London is the largest foreign exchange market; it largely serves Europe and Africa and handles over 30 percent of the world’s daily transactions. New York City handles about 20 percent of transactions and meets the needs of the Western Hemisphere. Tokyo services about 8 percent of the transactions for Asia, and Tokyo competes with Hong Kong and Singapore. Bahrain primarily covers the Middle East. Smaller foreign exchange markets exist in almost all countries.The foreign exchange market is a 24-hour market with international financial institutions connected by means of sophisticated telecommunications systems that enable instant, real-time exchange rate quotations. The largest20 banks in the world handle about 50 percent of all forex transactions; the largest forex traders are Citibank, JPMorgan Chase (United States), and Deutsche Bank (Germany). The function of the foreign exchange market is to facilitate international trade (in goods and services) and investment (FDI, security investment, and short-termmoney market flows). Hence, there is a close relationship between the balance of payments and foreign exchange markets.4-2a The Exchange RateAn exchange rateis nothing more than a price at which one currency can be converted to another currency. A U.S. company making sales in Europe and being paid euros will normally convert euros to dollars for deposit inits U.S. bank account. In a free-market-oriented foreign exchange market, major currency values are determinedby the demand for and supply of currencies; this is called the independent floating exchange rate system. For example, exchange rates between the U.S. dollar, euro, and yen are market determined. The values of some currencies (e.g., Indonesian rupiah, Thai baht, Russian ruble, Indian rupee, and Singapore dollar) are determinedby the managed floating exchange rate system. In this system, the currency’s value depends partly upon demand

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