Foreign Exchange Markets Summary

Essay by ladyheart143College, UndergraduateA+, February 2008

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Foreign Exchange Market � PAGE �1�


Foreign Exchange Markets Summary

W2 Assignment

Axia College of University of Phoenix

Instructor: Brian Butler

February 3, 2008

Foreign Exchange Markets Summary

In view of the fact that the international business environment is not set up with a worldwide medium for exchange, the foreign exchange market is a necessity for international trade. The major functions of the foreign exchange market are to transfer purchasing power, allocate open trade for international markets, monitor exchange rates from fluctuating to rigorously, and to aid in the import and export of goods between countries by providing credit for financing international trade.

The foreign exchange market can be described as a market where the value of currency is converted from one country to another. Currency can be bought, sold or traded through the foreign exchange market at a profit or loss depending on current exchange rates.

The foreign exchange market is worldwide. All currency exchanged is done through business transactions over the phone, by fax or electronic distribution networks via the internet; thus, every transaction is considered as over-the-counter.

Exchange rates can be described as the amount of units of one country's currency that can be exchanged for a set amount of units of another country's currency. Therefore, the value of one currency is always determined in relation to another currency. For instance, the value one U.S. dollar ($) in terms of one China renminbi (RNB) in terms of renminbi's would be RNB/$ exchange rate. Hence, if $1 = 5 RNB, to find the value of one RNB in terms of dollars, one would divide both sides by 5 to find the exchange rate. Therefore, one RNB = 1/5 = $0.2 whereas one $ would = 5/1 = 5RNB. This equation is used in...