Economics 101 by Alfred Mill

Author:Alfred Mill
Language: eng
Format: epub
Publisher: F+W Media

EXCHANGE RATES

What determines the price of apples? If you answered supply and demand, then you would be correct. What determines the foreign exchange price of a dollar? Once again, if you said supply and demand, then you are right on target. Whenever one currency is exchanged for another, foreign exchange has occurred and an exchange rate has been paid. The exchange rate is nothing more than the current price of a currency in terms of another currency. For example, $1 may buy you €0.73, £0.64, ¥89.41, or SFr 1.07.

Exchange rates are determined in the world’s largest market, the foreign exchange market. Annual trade volume approaches $1 quadrillion (a thousand trillion), with transactions occurring twenty-four hours a day. The foreign exchange market is dominated by the British, Americans, and Japanese with the vast majority of trades occurring in the U.S. dollar. The euro (€), pound sterling (£), Japanese yen (¥), and Swiss franc (SFr) are the other hard currencies most often traded.

Who’s involved?

Large banks are the main players in the foreign exchange market, brought together through a system of interconnected brokers. The banks serve both corporate and individual customers who need foreign exchange in order to conduct business.

Central banks also participate in the foreign exchange market in order to either manipulate exchange rates or to correct imbalances between their country’s current and financial accounts.

Finally, speculators looking to profit from arbitrage opportunities also participate in this immense market.

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