Foreign Exchange Market

Essay by axlianoCollege, UndergraduateA+, March 2009

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Alfred Del Valle

Foreign Exchange Market

Axia College of University of Phoenix

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 (Suranovic, 2005). Suranovic (2005) said that 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 (Suranovic, 2005).

Exchange rates can be described as the number of units of one country's currency that can be exchanged for a set of numbers of units of another country's currency (Suranovic, 2005). Therefore, the value of one currency is always determined in relation to another currency. For instance, the value one U.S. dollar ($) in terms of one China Yuan in terms of Yuan's would be Yuan/$ exchange rate (Suranovic, 2005). Consequently, if $1 = 6.8493 Yuan, to find the value of one Yuan in terms of dollars, one would divide both sides by 6.8493 to find the exchange rate. Therefore, one Yuan = 1÷5 = $0.146 whereas one $ would = 6.8493÷1 = 6.8493 Yuan. This equation is used...