1. International Economics The Foreign Exchange Market
14/11/61
Session 17
The Foreign Exchange Market
Aj.Noom

2. An Exchange Rate
An exchange rate is the price of one nation’s in terms of another nation’s money. There are two basic types of exchange rate, depending on the timing of actual exchange of moneys.
Spot exchange rate
This is the price of “immediate” exchange. For standard large trades in the market, immediate for most currencies means exchange or delivery in two working days after the exchange is agreed.
Forward exchange rate
This is the price set now for an exchange that will take place sometime in the future such as 30, 90, or 180 days from now .

3. Foreign Exchange Market
The foreign exchange market is the market in which national moneys are traded for other national moneys.
The foreign exchange market is not a single gathering place where trades shout buy and sell orders at each other. Rather, banks and the traders who work at backs are at the center of the foreign exchange market.

4. Two Main Types of Foreign Exchange Market
Retail Part of the Market
The trading done with customer is called the retail part of the market.
Interbank Part of the Market
The trading done between the banks active in the market is called the interbank part of the market.
The banks active in foreign exchange trading are located in countries around the world, so this is a 24-hours market. On working days, foreign exchange trading is always occurring somewhere in the world.

5. Half of foreign exchange trading involves banks in two location : London and New York

6. Using the Foreign Exchange Market
Retail Part
Retail Part
Individuals, businesses, other organizations
Interbank Part
Information

7. Demand and Supply for Foreign Exchange
U.K.
U.S.
Individuals, businesses, other organizations
Importer
Exporter
Need to pay by “pound”
Need to be paid by “dollar”
Bank
Pound
Dollar
Create Supply for “Pound”
Create Demand for “Dollar”
Unless the U.K. importers have large holdings of dollars to spend

8. The Spot Exchange Market :Fixed Exchange Rates
£1 = $
Excess Supply
If the U.K. government want to keep the exchange rate at $1.98/ pound, it needs to buy £50 billions from the market.
(This is done by selling $99 billion, equal to £50 times $1.98 per pound.) S£ D£
U.K. buy from U.S.
Equilibrium
U.S. buy from U.K.

9. If the Swiss government want to keep the exchange rate at $0
If the Swiss government want to keep the exchange rate at $0.6/ franc, it needs to sell 100 francs the strong demand.
Excess Demand

10. The Spot Exchange Market :Float Exchange Rates
£1 = $